Chapter 10: Unemployment

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Chapter 10: Unemployment by Mind Map: Chapter 10: Unemployment

1. Shortcomings of ERP

1.1. Cost of imports

1.1.1. Countries heavily dependent on importing raw materials face higher costs of attaining these raw materials. This will lead to an increase in cost of production Hence AS falls, with an upward shift of the AS curve. This can lead to a fall in national output and hence employment. Thus, in order to tackling cyclical unemployment, the rise in AD must be larger than the fall in AS.

1.2. Depreciation of foreign reserves

1.2.1. Government need to supply the domestic currency and demand foreign currencies, and in the process accumulating foreign reserves. Thus there is a risk associated with holding foreign currency reserves.


2.1. Retraining and Re-education

2.1.1. Government provide and fund education, retraining facilities and assistance to the structurally unemployed. Moving resources and labour from depresses to expanding industries. This is a form of fiscal policy. (e.g. Singapore Development Agency WDA )

2.2. Protectionist measures

2.2.1. Government can discourage demand for imported goods by imposing import tariffs to avoid changes to the structure of the economy.

2.3. Movement of resources

2.3.1. Government can encourage labour to move to areas where there are jobs and provide financial assistance and housing amenities at concessionary rates

3. Shortcomings of FP & MP

3.1. The possibility of Crowding-out effect

3.1.1. lead to where government spend more than what it collects as tax revenue ( Budget deficit )→ Draw down on the national reserve. → Government will compete with the private sector for loans and drive up interest rates. → Lowering investment expenditure. AD initially increases as government expenditure increases and then decrease as private investment are lowered. → Fall in AD as fall in I > raise in G

3.2. Size of multiplier

3.2.1. If the size of multiplier is small, it might be limited in altering AD. An decreasing in G might lead to a multiplied decrease in AD. Which might be ineffective in dealing will demand pull inflation CASE STUDY : The size of multiplier is small due to high MPS & high MPM

3.3. Time lags

3.3.1. Decision lag & execution lag Thus, when the action is taken, the situation might be worsen or changed.

4. Structural unemployment

4.1. Mismatch between the skills possessed by the retrenched workers and those required by the new industries.

4.2. Results mainly from the immobility of resources or when there are permanent changes in demand and supply conditions.

4.2.1. Geographical Immobility When the skills possessed by the retrenched workers are not required and they are unable or unwilling to travel far away to seek employment

4.2.2. Occupational Immobility The situation where the skills possessed by the retrenched workers are no longer required by the economy and they need to learn new skills

4.3. Causes

4.3.1. Change in the structure of the Economy

4.3.2. Change in demand conditions Technological advancement (e.g. type writer) Changes in consumer's tastes and preferences against the good concerned Availability of cheaper and better quality imports Loss of price competitiveness of exports overseas markets Importing countries producing similar import subsititutes

5. Definitions

5.1. Labour force

5.1.1. The labour force of a country is made up of those who are employed and those who are unemployed but are actively looking for a job. It is also called the working population or the economically active population.

5.2. Unemployment

5.2.1. Unemployment is defined as the situation in which people who are willing and able to work cannot find work.

5.3. Voluntary Unemployment

5.3.1. It is created when labour chooses not to take up the available employment, anticipating that better jobs can be found.

5.4. Involuntary Unemployment

5.4.1. It is created when labour is willing and able to work but cannot find any available job.

5.5. Underemployment

5.5.1. The ability of labour to obtain employment but is not being used to the maximum ability

6. Calculation

6.1. Unemployment rate

6.1.1. (No. of unemployed/ Total labour force) x 100

6.2. Labour force participation rate (LFPR)

6.2.1. (Working population/ Total population) x 100

7. The economically inactive population is made up of all those who are not working and are not looking for work. These include housewives, full-time students, the ill, the handicapped and the retired

8. Frictional Unemployment

8.1. Associated with normal labour turnover, imperfect market knowledge. It is sometimes referred to as temporary or search unemployment as it involves switching of jobs and looking for new contracts. Lack of information concerning job opportunities.


8.2.1. Employment agencies and work-attitude campaigns Employment agencies can provide information on job prospects in other industries through national newspaper or online databases Job fairs to bring potential employers and employees together. Work attitude campaign can improve team spirit, work-management relationship and promote welfare so as to reduce labour turnover

8.2.2. Reducing unemployment benefits Reduce liberal unemployment benefits such as generous food vouchers and weekly unemployment allowances to encourage the unemployment to accept a job

9. Seasonal Unemployment

9.1. Seasonal nature of the demand for the final product and thus the fluctuating demand for labour. (e.g, harvest season / off-peak travel season)


9.2.1. Government can provide alternative jobs during off-peak season Fall in foreign demand lead to economic downturns of trading partners

9.2.2. encourage multiple cropping and crop rotation to raise labour mobility during off-peak seasons

10. Natural rate of unemployment

10.1. Unemployment rate between 1-4 %

11. Cyclical Unemployment

11.1. Caused by inadequate demand for a country's goods due to weak foreign and domestic demand

11.1.1. Fall in domestic demand A downturn in the domestic economy


11.2.1. Fiscal policy Raising government expenditure ( ↑G ) Raising government expenditure on goods and services Raising government expenditure on transfer-payments Adjusting tax on direct taxes Lowering Personal Income tax rates ( ↓T ) Lowering Corporate Tax rates Adjusting tax on indirect taxes Raising Import taxes

11.2.2. Monetary Policy Lowering bank rate by lowering the cash ratio as well as purchasing government bonds Lead to a increase in money supply (From M0 to M1) Lowering the interest rates ( from R0 to R1). → Cost of borrowing falls → rise in I & C → raise the equilibrium level of income (from Y0 TO Y1)

11.2.3. Exchange rate policy (ERP) Depreciate currency The central bank can sell its currency in the exchange rate market. This will create an increase in supply of the country's currency in the market. This will lead to cheaper export and import dearer. → Result in a higher export revenue and a rise in AD. Hence, more employment is generated.