(2017) A Level H2 Econs Paper 2 Essay Q4

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4. High rates of unemployment remain a major issue in many economies of the world. An understanding of various causes of unemployment is needed in order for a government to decide on the economic policies that would help its economy achieve full employment.

(a) Discuss the various causes of unemployment and the economic policies that would help to achieve full employment in today's globalised world. [25]

Introduction 

1. Define full employment level 

2. Explain that the 3 types of unemployment that is usually present in most economies are cyclical, structural & frictional unemployment (for this essay, we will discuss cyclical & structural unemployment) 

3. Explain economic policies that would help to achieve full employment can be classified as demand management or supply-side policies 

4. Identify that ‘today’s globalised world’ is a context that needs to be addressed by pointing out the issues associated with globalisation affecting the nature of unemployment / difficulties in the use of policies 

Cyclical unemployment 

1. Cyclical unemployment is also known as demand deficient unemployment 

2. Occurs usually due to a fall in aggregate demand 

3. When aggregate demand falls -> output / income falls -> firms hire less factor inputs to produce the lower level of output required à this results in hiring of less workers -> increase in unemployment 

4. A recession like the worldwide recession caused by the COVID-19 pandemic can be a cause of cyclical unemployment. Consumers cut back on consumption spending due to lockdowns, firms feel less optimistic about the future and therefore cut back on investment spending and countries receive less tourists, causing a fall in export earnings – a fall in C, I & (X-M) can result in a fall in AD -> causing cyclical unemployment 

Demand management policies to address cyclical unemployment 

Expansionary fiscal policy (or alternatively use monetary policy) 

1. The government can increase spending through increasing direct hiring of civil servants (armed forces, teachers, administrative officers) or carry out more infrastructure spending (upgrading roads, transport networks, rail networks, hospitals, schools) -> increasing G 

2. The government can also cut personal income taxes as this will result in an increase in disposable income -> increase C 

3. The government can also cut corporate income taxes as this will result in an increase in after tax profits -> encouraging an increase in I 

4. As C, I, G increases -> AD increases 

5. When aggregate demand increases à output / income increases -> firms hire more factor inputs to produce the higher level of output required -> this results in hiring of more workers -> fall in unemployment 

Devaluation of the exchange rate 

1. The Central Bank could carry out a devaluation of the exchange rate via selling of domestic currency on the foreign exchange market -> this increases the supply of domestic currency -> prices of domestic currency (in foreign currency value) will fall 

2. This will make prices of exports cheaper à increasing export competitiveness ->  increase in demand for the country’s exports -> increase in X 

3. As the same time, imported goods become more expensive for locals to buy -> reduce demand for imports -> decrease in M 

4. (X-M) increases -> AD increases à output / income increases -> firms hire more factor inputs to produce the higher level of output required -> this results in hiring of more workers -> fall in unemployment 

5. Limitation: Whether (X-M) actually increases is subject to M-L condition 

Contextualising the appropriateness of the policies to today’s globalised world 

1. In today’s globalised world, a large part of what affects the unemployment rate is due to external factors as opposed to domestic factors, as demonstrated by the recession triggered by the COVID-19 pandemic 

2. For example, a significant reason why AD is falling is due to a fall in (X-M), then a devaluation policy may need to be considered in conjunction with the usual interest rates monetary / fiscal policy to boost AD. 

Structural unemployment 

1. Structural unemployment occurs when there is a mismatch between the skills of workers who are unemployed and jobs that are available in the economy. 

2. This occurs as countries go through structural changes and due to technological advancements, certain jobs / occupations may become obsolete. 

3. For example, automation may result in cashiers being replaced by self-checkout kiosks & street hail taxi-drivers may become less relevant in a world where we book a ride through a phone app. 

Supply side policies to address structural unemployment 

1. Supply side policies to address structural unemployment typically involve spending on education or retraining of workers whose skills have become obsolete 

2. This is so that these workers will be able to take up jobs in other productive sectors of the economy 

Contextualising the appropriateness of the policies to today’s globalised world 

1. In today’s globalised world, the ease of capital flows and investments into various countries will mean that technology is more quickly imported and implemented in countries. 

2. For example Grab / Uber has very quickly taken root in many countries around the world and facilitated user adoption through subsidised rides 

3. When unregulated, this quickly affects the livelihood of taxi drivers whom may see significant drops in income / for some of them it simply becomes unsustainable (they become unemployed) 

4. We therefore need to consider whether the government needs to take more pro-active steps such as regulation to slow down the pace of such technology adoption / investments coming in so that education / re-training can even be done 

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