Notes

UNEMPLOYMENT
‣ Structural
‣ Cyclical
‣ Frictional

CYCLICAL UNEMPLOYMENT (lack of AD)
during recession, DD ↓, shifting AD leftwards
firms cannot sell their current output which results in piling up of stocks
firms cut back on production and fire workers, resulting in more workers without jobs thus higher unemployment

STRUCTURAL UNEMPLOYMENT (structural change of the economy)
when workers do not have skills to obtain long-term employment
DD-side: when a firm or industry has become uncompetitive, workers made redundant cannot immediately find jobs easily in other industries as they do not have the relevant skills or they are unwilling to move to another region with better job prospects
SS-side: technological advancement resulting from the successful growth of new industries using labour-saving technology causes mismatch of skills of the registered unemployed and those required by employers (affects SRAS)

FRICTIONAL UNEMPLOYMENT (imperfect knowledge)
it takes time for people to find the right jobs and for employers to find the right people to hire; there is a time lag between leaving and finding employment.
employers are not fully informed about the type of labour available and workers are not aware of the jobs available.


CONSEQUENCES OF UNEMPLOYMENT PIHTS
▪︎ Loss in Production & Income : actual output is below potential output; under-utilisation of resources
▪︎ Loss in Human Capital : prolonged unemployment causes a person to lose touch of the skills & knowledge he once possessed; face increasing competition with fresh graduates whose human capital is intact and cheaper to hire
▪︎ Loss in Tax Revenue & Increase in Unemployment Benefit
▪︎ Loss in Social Stability : esp. among the young, there is increased crime, drug abuse, alcoholism, violence and vandalism which deteriorates SOL


POLICIES
⇒ EMP (for cyclical) ‹↑money supply › ‹↓IR ›
C & I ↑due to ↑COB, ∴ AD rises and shifts right
Limitations:
∙ DD for I may be price inelastic → ↓IR lead to a less than proportionate increase in I as firms' business confidence is low, thus ↓IR is insufficient
∙ when there is high unemployment rate, lower IR is unlikely to stimulate consumption spending as consumers are pessimistic about their future income
∙ expectations & sentiments play a more important role than IR in determining the spending decisions of consumers & firms - firms will not borrow to invest if they predict a continuing recession
*size of multiplier also effects*
if multiplier is small, national income will not increase significantly
even if AD ↑, national income will not ↑significantly, thus employment will not ↑by a huge amount

⇒EFP (for cyclical) ‹↑government spending › ‹↓taxes ›
lower personal income tax → ↑disposable income → thus, ↑consumption spending
firms have incentive to produce more goods & services
Limitations:
∙ crowding out effect - government having to borrow from banks and thus competing with firms; banks make their IR ↑; firms less likely to invest ( I↓)
∙ multiplier size - limited effect is multiplier is small; high MPW ( MPS + MPM + MPT) dampen the effect of ↑in GE as significant portion of it is leaked from the economy → less increase in generated back into the economy to further ↑ national income and output
∙ time lag - takes time for recognition of problem, implementation of policy, and effects to materialise

⇒ SS-side policy (for cyclical) ‹ to ↑SRAS ›
∙ subsidies / grants to firms for more efficient methods of production
∙ financing retraining schemes to improve skills & productivity « ↑DD »
∙ reducing trade union power

⇒ For Structural Unemployment
∙ financing retraining schemes
e.g. Training Assistance Scheme, Workfare Training Support Centre
∙ increasing capacity of training infrastructure for workers
e.g. CET plan
∙ gearing education system to meet requirements of new economy
Limitations:
∙ workers & employers may be resistant to training
∙ may not fully acquire the skills or know how to apply what they have learnt into context
∙ government has lesser budget on other sectors

⇒ For Frictional Unemployment
∙ improve job information in labour market through job centres, private agencies and newspaper
∙ reduce / remove unemployment benefits to retrenched workers as this will increase urgency to find employment
Limitations:
∙ information on labour market not reached to people looking for job (imperfect knowledge)