(2022) A Level H2 Econs Essay Q4 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)
(2022) A Level H2 Econs Paper 2 Essay Q4
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4. During the pandemic, there was a fall in investment and a rise in unemployment. Innovation-based investment is a good way to stimulate the economy but, unless appropriate government policy action is taken, this might lead to another type of unemployment.
(a) Explain how a fall in investment might lead to one type of unemployment while a rise in innovation-based investment might lead to another type of unemployment. [10]
How fall in investment can lead to cyclical unemployment
A fall in investment (say due to pandemic-caused pessimism) will result in AD (as I is a component of AD)
A fall in AD (reflected by a leftward shift of AD from AD2 to AD1 → fall in real NY/output from Yf to Y1 → this will result in firms hiring less factor inputs as there is now a lower level of output to be produced)
This causes an increase in cyclical unemployment as some layoffs occurs.
A rise in innovation-based investment might lead to a different type of unemployment
Microsoft announced an investment of $10 billion into AI tool ChatGPT (Chat Generative Pre-trained Transformer) in 2023 which is a chatbot developed by OpenAI and launched in November 2022. It is built on top of OpenAI’s GPT-3 family of large language models and has been fine-tuned (an approach to transfer learning) using both supervised and reinforcement learning techniques.
It has been recently taken and passed a law exam in 2022 and secured a C+.
The rise of ChatGPT may cause the obsolescence of certain jobs e.g. copy-writers or speech writers who write for a living as ChatGPT can be given instructions or prompt and can write copies and speeches almost immediately.
At the same time, there will be an increase in demand for skilled workers who have competencies in AI technologies, programming, and data science.
Thus there will be a mismatch between the workers who have become unemployed and jobs available in the economy - causing structural unemployment.
Note: Use of diagram to illustrate is appropriate.
(b) Discuss the extent to which a rise in Singapore government spending on investment in major capital projects and in human capital are both required to reduce unemployment in a post-pandemic world. [15]
How Singapore government spending on investment in major capital projects reduces unemployment
Spending on major capital projects can include projects such as Changi Jewel, Terminal 5, upcoming and new MRT stations and lines, new schools, hospitals and highways.
Such spending can be classified as an increase in Government spending (G) which is part of AD. An increase in AD from AD0 to AD1 → increase in real NY from Y0 to Y1 / output via k → higher economic growth.
As firms produce a higher level of output, they will hire more factor inputs including labour → this will result in a fall in cyclical unemployment.
Note: Use of diagram to illustrate is appropriate.
How Singapore government spending on human capital reduces unemployment
Spending on human capital can be in the form of provision of subsidies to encourage workers to go for upgrading of skills e.g. Skills Future Mid Career Enhanced Subsidy which allows workers to go for upgrading courses and have 90% of course fees subsidised by the government or Workfare Skills Support Scheme which provides low-wage workers with both a training allowance and incentive upon completion of the course to encourage them to go for skills upgrading.
As these workers gain new skills that are more relevant to the current economy, they may be able to take up new jobs especially if their current jobs are facing obsolescence.
This can help to reduce structural unemployment.
Are both required to reduce unemployment in a post-pandemic world?
Are major capital projects required to reduce unemployment in a post-pandemic world?
In a post-pandemic world, economic growth from exports for Singapore may be inconsistent as different countries may have different rates of recovery from the pandemic (e.g. China has only started lifting border restrictions in Dec 2022), and thus income growth of trading partners for Singapore may not be certain or consistent.
As such, increasing government spending can provide an alternative boost to AD when export earnings (which affect X-M) may not see a consistent / certain increase
Are investments in human capital required to reduce unemployment in a post-pandemic world?
Structural changes have occurred as a result of the pandemic, e.g. companies may now opt to hold meetings virtually through Zoom as opposed to holding physical meetings across borders. Employees may now also spend some time working remotely from home as compared to working at offices.
These structural changes may result in shifts in demand for certain industries e.g. less demand for business travel / offices while increasing demand for virtual meeting applications such as Zoom.
Investments in human capital can help workers acquire skills that can help them remain relevant e.g. pick up skills such as web design, programming or internet marketing which may result in workers becoming more employable in the post-pandemic world.
In addition, investments in human capital can increase the productivity of workers → allowing workers to produce more given the same amount of resources increasing the productive capacity of the economy → this can shift LRAS to the right → increasing growth.
Conclusion
In a post-pandemic world, major capital projects and investments in human capital can help Singapore reduce unemployment.
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