Evaluate the view that full employment should be the primary macro-economic objective of governments. [25]

The main macro-economic objectives of governments include ensuring stable prices and low inflation; promoting economic growth, both in terms of actual and potential growth; full employment (or conversely low unemployment), and ensuring a healthy balance of payments (BOP). This paper argues that, on the one hand, while governments should aim for full employment, full employment should not just be their primary macro-economic objective.   

Unemployment is defined as the situation where those who are able and willing to work are not able to get jobs, and full employment involves zero or very low unemployment. (In economic theory, there are many types of unemployment, such as frictional unemployment and demand-deficient unemployment, among other examples.) In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. It can be argued that an unemployment rate of around three percent is close to full employment. However, it is difficult to determine the full employment level precisely. Full employment implies that the economy is operating at its full capacity and there is no output gap or demand-deficient unemployment.

One of the most important reasons that governments target full employment is that because high unemployment has various social and economic costs. First, unemployed citizens will earn little income, enabling little consumption as they do not have much disposable income. Also, the unemployed may become less motivated and less skilled, losing their human capital, which makes it more difficult to find employment in the future, and with a lack of skills, even with economic opportunities, they cannot get jobs. Also, during periods of high unemployment, the government will have to spend more on unemployment benefits and other transfer payments, which may increase government borrowing. Finally, unemployment may exacerbate social problems such as crime, vandalism and social alienation, especially if unemployment is concentrated among young people, for example in Spain during the financial crisis, when youth unemployment rose massively. Therefore, given the social and economic costs of unemployment, there are many benefits to achieving full employment.

To achieve full employment, Keynesian economists will argue that it is necessary to increase AD when the economy is in a recession. For example, this can be achieved by expansionary fiscal or expansionary monetary policy, which means increasing government spending and reducing direct taxes, and increasing money supply and reducing interest rates respectively. These expansionary policies will cause AD to increase and shift to the right, increasing inflation if the economy is at or near the full employment level, but if there is spare capacity or un-utilised resources there should only be a limited increase in inflation. Therefore, there is a strong economic case for aiming for full employment through demand management policies. And the Phillips curve suggests there is a trade-off between inflation. Therefore, achieving full employment may cause the side effect of demand-pull inflation.

On the other hand, not all economists agree that full employment should be the primary objective of governments. They argue that unemployment cannot be reduced below the natural rate of unemployment (or NAIRU, or Non Accelerating Inflation Rate of Unemployment) without causing inflation. Keeping inflation low is also another objective of governments. Also, any reduction in unemployment below the natural rate, due to demand management policies, will just be temporary. This is because the economy will return to the equilibrium level of national output. Therefore, monetarist economists do not believe there is any point in reducing unemployment below the natural rate because the only effect will be to increase inflation. Therefore, according to monetarist economists, attempts to achieve ‘full employment’ of three percent may conflict with other macro-economic objectives, such as higher inflation. For example, many economies have an inflation target as the primary objective of their Central Bank, such as the Federal Reserve, and the economic argument here is that if low inflation is achieved, it will enable economic stability and encourage investment and sustainable growth in the long term. This is preferable to a government using demand-management policies and causing economic boom and bust cycles.

However, another way of aiming for full employment is to use long run supply side policies to try and reduce the natural rate of unemployment. For example, increased training opportunities and better education can upgrade the skills of workers and reduce structural unemployment, which is what initiatives such as SkillsFuture aim to achieve. However, these economic policies will take time and it may not be possible for the government to reduce all unemployment because of imperfect information and bounded rationality on the part of government agents.

And low unemployment can also be achieved through keeping inflation low and maintaining steady and sustainable growth. For example, in the 1990s, both unemployment and inflation fell due to supply side policies and effective demand management. Therefore, this suggests that a low inflation target can also be effective in meeting other objectives. 

In conclusion, overall, low unemployment is a desirable objective, but the economic policies to achieve this need careful examination because of their limitations and alternative macro-economic objectives. Increasing AD will only be effective if there is a recession and spare capacity in the economy. To reduce the natural rate, long run supply side policies will also be needed. In addition, full employment does not necessarily have to be inflationary too, as economic growth is sustainable, we could get close to full employment without inflationary pressures.

JC Economics Essays – This A level economics essay was based on lecture material from a UK economics tutor. It was in response to an adapted question from the A level Economics syllabus. Also, it was written during examination conditions of time pressure. What did you learn from this response, and what economic theories did it tap on to addressing the economics essay question? However, this economics paper is not very strong in the anti-thesis arguments - what could be done better? How could the other side of the story or narrative be made even better? In addition, there were some economics terms which were mentioned - did the writer define the terms? How could the writer have woven the definition of the terms into the sentences? These critical thinking questions should be asked when you read economics essays. 

At JC Economics Essays, we focus on strong economic writing skills, clear and direct explanations of core economic concepts, and the use of relevant, real-world examples to strengthen arguments. And we also strengthen students’ understanding of economics as a subject. We also focus on critical thinking and evaluating economic arguments. Thank you for supporting us, and cheers! 

A government decides that its economy is currently operating with an unacceptably high level of unemployment. Discuss the view that the government's best option as a method of reducing unemployment is to use discretionary fiscal policy. [15]

Unemployment refers to the situation where people are actively seeking employment but are unable to find work or unwilling to accept the jobs that are currently available. There are many types of unemployment, such as real-wage unemployment, demand-deficient (cyclical) unemployment, structural unemployment, seasonal, and frictional unemployment. In this essay, I will be discussing whether discretionary fiscal policy is the best option to reduce unemployment.

(Insert AD-AS diagram)

In figure 1, the economy was originally below the full employment level at Y1. In order to reduce unemployment, the government can use expansionary fiscal policy to shift AD1 to AD2 so that Y1 will reach Yf which will reach full employment level. Expansionary fiscal policy involves increasing government spending and reducing direct taxes. There are two main types of direct taxes, personal income tax and corporate income tax. When personal income tax is reduced, households will have more disposable income, and thus consumption will increase. Moreover, when corporate income tax is reduced, firms will have more post-tax profits, and thus investments will increase. Since AD = C + I + G + (X-M), AD will increase and shift to the right, hence solving the problem of demand-deficient unemployment.

However, there are limitations to expansionary fiscal policy. Firstly, it can be massively limited by tax insensitivity. Even when corporate taxes are cut, firms may not invest during an economic downturn as they are likely to be pessimistic about the future. Similarly, despite a reduction in personal income taxes, households who are fearful of future pay cuts and retrenchment are more likely to save rather than spend any potential increase in disposable income. Secondly, it may also result in the crowding out effect. Expansionary fiscal policy involves running a higher budget deficit that is probably financed from increased borrowing, especially since increases in government spending are sometimes matched by decreases in the rate of taxes. The demand for loanable funds rises and hence raises interest rates, which in turn deters consumption and investment. Higher interest rates will also cause the currency to appreciate, thereby curbing net exports because exports appear relatively more expensive while imports appear relatively cheaper. The expansionary effects of the budget deficit are therefore negated by a reduction in consumption, investment and net exports. What occurs is therefore merely a diversion of private demand towards public demand, rather than any real net rise in overall demand. Private sector demand is said to be ‘crowded out’ by public demand.

Alternatively, the government can also use expansionary monetary policy to reduce unemployment. Expansionary monetary policy occurs when the central bank increases the money supply. Interest rates will decrease and the cost of borrowing becomes cheaper. Households will find it cheaper to borrow to consume and firms will find it cheaper to borrow to invest. Both consumption and investment will rise. Since AD = C + I + G + (X-M), AD will increase and shift to the right thus reducing demand-deficient unemployment. Assuming the country has an open economy with a freely floating exchange rate system, the decrease in interest rate will cause the currency to depreciate. Currency becomes weaker and there will be hot money outflow. Exports become relatively cheaper while imports become relatively more expensive. Exports will increase while imports will decrease. Since AD = C + I + G + (X-M), AD will increase further and shift to the right further, hence, further reducing unemployment.

However, there are also limitations to expansionary monetary policy. One of the limitations is that consumption and investment are likely to be interest insensitive during a severe economic downturn as firms and households are unlikely to borrow when the economic outlook is very poor. Another limitation is the liquidity trap, which refers to the situation where interest rates are already so low such that the further cuts in interest rates are unlikely to have any impact in stimulating borrowing. At the extreme, when interest rates hit zero, this means that there is no more room for further interest rates cuts and expansionary monetary policy stops being viable.

In conclusion, it is not enough to use expansionary fiscal policy as the only way to reduce unemployment as there are many limitations to the policy. However, it will be best if both expansionary monetary and fiscal policy are used concurrently, so that the strength of one policy can overcome the weakness of the other. For instance, in a mild economic downturn, using monetary policy is arguably better than using fiscal policy as interest insensitivity has not set in and monetary policy is not affected by the crowding out effect. Whereas, in a deep recession, interest insensitivity is high and expansionary monetary policy generally loses its effectiveness. Hence, by using both policies concurrently, it will be able to reduce unemployment more effectively. 

JC Economics Essays - This is a H1 / H2 A levels economics essay paper response with a well developed and interesting answer. This is a very good effort. As good practice, the questions to ask yourself here are - what alternative approaches could you take to answering this economics question? This economics essay was also written under timed conditions, and so is not a complete response. What other arguments could be brought in to help bolster or counter-argue against the case? Think like an economics tutor critiquing and analysing the essay - what could be better improved, and why? 

Special thanks to HH for her kind and useful contribution, and also special thanks to SS for vetting and editing her response. HH has made great improvements in her economics  since 2015. Thanks for reading and cheers! 

(a) Explain the likely types of unemployment in Singapore that could challenge sustainable growth. [10]

(a) Explain the likely types of unemployment in Singapore that could challenge sustainable growth. [10]

Introduction

What is unemployment? Unemployment is the situation when people willing and able to work are unable to find employment, with the most common types being structural unemployment, demand-deficient unemployment, frictional unemployment, and seasonal unemployment. This essay explains the likely types of unemployment in Singapore that could challenge sustainable economic growth. Unemployment in Singapore that could affect sustainable growth is likely to be brought about by the following major factors: changes in the underlying structure of the economy and cyclical factors.

Body of Essay

The first likely form of unemployment in Singapore that could challenge sustainable growth would be structural unemployment. Structural unemployment occurs when there is a mismatch of skills and knowledge. For instance, structural unemployment occurs when workers in sunset industries, with declining demand for their products, are unable to be reemployed in new, growth industries, with increasing demand for those new and probably high-tech products, due to a mismatch of skills, talents, and training for the new changed production structures. Also, for example, in Singapore in the 1980s, there was a shift from low-end production to higher-end production and this shift required workers to have the required higher level skills. As a result of the mismatch of skills required of workers to work in the new high-end production industries, structural unemployment occurred. Singapore often faces structural changes due to the dynamic changing needs of her economy, and the extent of structural unemployment depends on the adaptability of workers to adapt to these new needs.

The second form of unemployment that could challenge Singapore’s sustainable growth would be cyclical unemployment, also known as demand-deficient unemployment. This unemployment is linked to the business cycle, where downturns occur now and then, aggregate demand (AD) falls, causing unemployment, and a fall in actual economic growth. Actual economic growth can be thought of as an increase in real national income in a given period of time. In particular, due to the small size and relative openness of the Singapore economy, dependence on trade makes Singapore vulnerable to cyclical unemployment, economic recessions, and falling AD. This leads to unemployment because there would be a fall in the general price level, profit expectations would also fall, and producers would cut down on employment, resulting in more unemployed workers with fewer job vacancies available.

Falling AD of the Singapore Economy

The sustainable growth of the Singapore economy can be defined as a sustained increase in the real national output or real national income (real Y) over a period of time. Structural and demand-deficient unemployment affect the sustainable growth of the Singapore economy as they affect the sustained increase in Singapore’s national income. During periods of low economic activity and high unemployment, there will be a fall in the consumption (C), investment (I), and net exports (X-M) of an economy, shifting AD to the left. The fall in C is a result of the fall in the disposable income of the workers as a result of being unemployed. The fall in C, I and (X –M) would lead to a fall in the AD. Assuming that the Aggregate Supply (AS) curve is unchanged, the fall in AD would translate into a fall in real Y over the period. This fall in real Y over a period of time would challenge Singapore’s sustained growth.

Conclusions

In conclusion, structural and demand-deficient unemployment are the two main forms of unemployment which potentially challenge the sustainable growth of the Singapore economy, lowering the national income of the economy. There are also other forms of unemployment such as frictional unemployment or seasonal unemployment that would also occur in Singapore. However, such forms of unemployment would not affect the sustainable growth of the Singapore economy; as such both structural and demand-deficient unemployment are by far the biggest enemies to growth.

JC Economics Essays: Tutor's Comments - Special thanks to TJL for his kind contribution. TJL is a friend (fellow teacher) of mine I knew from National Institute of Education (NIE) days, and who later went on to become an excellent, outstanding Economics tutor at IJ after completing his PGDE. This Economics essay was written under examination conditions. In the earlier, past few posts, here on JC Economics Essays, I have given detailed comments about what was right, good, and great about the essays and gave my view, comments, and ideas. It's time for me to revert back to the older Socratic questioning style of earlier posts here on my site! TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, and ignoring the provenance of this sample/ model /version of the answer given by a tutor - what grade would you give this Economics paper, and why? what are the good things that you can learn from this Economics paper, and what are bad things that you should not learn from this paper? also, how would you improve on this Economics paper? how else could you approach it? Do remember to ask questions, and read with a critical, yet open, constructive mind. Thanks for reading and cheers!

(b) To what extent is fiscal policy the most effective measure to lower the unemployment rate in Singapore? [15]

Singapore’s unemployment rate could surge to a 20-year high of 5 percent next year. This would be the highest level of unemployment since 1986.

Adapted from The Straits Times, February 2009

(b) To what extent is fiscal policy the most effective measure to lower the unemployment rate in Singapore? [15]

Fiscal policy is the use of government spending and taxes to affect the AD of an economy in order to pursue the macroeconomic goals of governments. In the case of unemployment, expansionary fiscal policy can be used – where the government increases government spending and lowers taxes (both personal income and corporate) in order to boost AD. This essay argues that to a large extent, while fiscal policy has the potential to work in Singapore, it is not the most effective measure to lower the unemployment rate and there are many other measures which are more effective given Singapore’s context.

Fiscal policy

It is clear that on the one hand fiscal policy in theory can reduce cyclical unemployment. With an increase in government spending and lowering of income taxes and corporate taxes, C, I and G increase and thus AD shifts to the right. Due to the multiplier effect, real national income would increase, and as real output increases, there would be a need for more workers. This would overcome cyclical unemployment.

Also fiscal policy, if spent on infrastructure and other areas such as skills upgrading, can lead to solving structural unemployment. For instance, the Singapore government spends a lot of money on the Workforce Development Agency. If the fiscal policy is directed towards increasing the supply side (supply side policy), then the skills gap between workers and those required by industries might be solved and thus structural unemployment might not be a problem. Hence, fiscal policy does have some strengths and could be used as a viable policy.

Limitations of fiscal policy

On the other hand, there are limitations of fiscal policy given Singapore’s context. The multiplier effect is small, given Singapore’s high MPM and MPS (marginal propensity to import and save). Alternatively, it can be said that there are many leakages given Singapore’s context – as it is small and open. Also, a cut in taxes may lead to a small shift in C and I if there is widespread economic pessimism, and a reluctance to spend more money. In addition, there is a time lag effect where it takes a long time to formulate policies to decide on the appropriate tax cuts and which type of government spending to raise.

Other policies might work better

Furthermore, fiscal policy may not be the most effective policy to reduce cyclical unemployment. There are two other policies that might be able to reduce unemployment better in Singapore’s context. The first is exchange rate policy and the second is signing of new FTAs (Free Trade Agreements).

First, given that Singapore is a small and export oriented economy, where the total value of exports and imports comprise more than her GDP, an exchange rate policy could be implemented. In Singapore’s case, due to the classic trilemma, Singapore does not pursue monetary policy but instead pursues an exchange rate policy through the use of a managed float system (dirty floating). Depreciating the Singapore dollar would lead to an increase in (X-M) and thus increase real output and lower unemployment in Singapore by shifting AD to the right to the full employment level. At the same time it should also be noted that there is no perfect policy because cost push inflation could be a result of this exchange rate policy as the higher prices of imported raw materials into Singapore could lead to higher prices. Given that Singapore imports a lot of her raw materials and goods and services, this is a distinct possibility.

Second, by signing more FTAs Singapore has more access to international, foreign markets. This will help Singapore reduce her reliance on major trading partners if those countries experience recession. Thus, if X goes up, then AD will also increase, and thus cyclical unemployment will be lowered as the economy experiences actual growth if the FTAs are successful. On the other hand there are also search costs and increased competition with local producers in Singapore which might not be politically acceptable, and Singapore might also become more susceptible to external shocks to her economy.

Third, by increasing information available to workers, the government can reduce frictional unemployment. This is a simple solution that does not involve fiscal spending or exchange rates or FTAs, and should be used to reduce frictional unemployment.

Conclusions

In conclusion, the dominant cause of unemployment in Singapore is likely to be cyclical unemployment because the economy is dependent heavily on external markets, and therefore while fiscal policy can be used, it is not effective to a large extent, given the small multiplier effect. Given the changing dynamic comparative advantage of Singapore’s economy, it is imperative that policies to lower structural unemployment have to be considered seriously as well. In the final conclusion, both fiscal and other policies have to be used together to reduce the various types of unemployment in Singapore.

JC Economics Essays - Tutor's Commentary: This H2 Economics essay is also very well written, and addresses the question pertinently. The usual questions are: what can I do better, what I can improve on, and what have I learnt from reading this essay? This essay and the previous part were both very professionally written and specially designed and targeted specifically to answer the question. Yes, there can be alternative views, and there should be different approaches - but what is the strength of this approach? What have you learnt from here?

*PS I have had the sudden and rather zany idea that I should indeed try to make this site the most popular free Economics website for students reading the A levels ... and why not? I shall just do my best. Special thanks to my wonderful and encouraging students (you guys know who you are) who have complimented me on my Economics website. I will do my best. Cheers :) *

(a) Explain the main types of unemployment in Singapore. [10]

Singapore’s unemployment rate could surge to a 20-year high of 5 percent next year. This would be the highest level of unemployment since 1986.

Adapted from The Straits Times, February 2009 (adapted from an examination question)

(a) Explain the main types of unemployment in Singapore. [10]

Unemployment is commonly defined as the situation in which people who are willing and able to work are unable to find work at the prevailing wage rate, and there are a few main types of unemployment such as cyclical (sometimes called demand-deficient unemployment), structural, seasonal, and frictional unemployment. In Singapore, the three most common and main types are cyclical, structural, and frictional unemployment, given Singapore's context. This paper explains these three main types of unemployment. 

Cyclical Unemployment

Demand-deficient unemployment or cyclical unemployment is a major cause of unemployment in Singapore because Singapore has a large external sector and is largely dependent on external demand for economic growth. For instance, in the contract manufacturing of electronics, Singapore exports heavily to the rest of the world. If international demand for Singapore’s electronics exports falls, then firms producing those goods will face a lower demand. Hence, firms that face decreased demand for their goods and services might reduce the cost of production by reducing their output and employment.  Another way of looking at this same issue is - since Singapore is a small and open economy, heavily dependent upon exports, when exports fall, Singapore's AD will fall, and shift to the left, thus lowering national output and income, while increasing demand-deficient unemployment. 

Structural Unemployment

As a result of globalisation, there is a lot of restructuring in Singapore and in the process structural unemployment might result in Singapore. First, Singapore has changed from a labour intensive to capital intensive economy, and thus different skills are required. Workers who do not have the appropriate training and expertise to move into a different industry are laid off, thus contributing to unemployment. For instance, Singapore has recently moved into the biomedical and R&D (Research and Development) industries and thus workers who can only work in the lower end manufacturing industries might find themselves unemployed since mass production work can be outsourced to India and China.

Frictional Unemployment

Frictional unemployment happens because it takes time for people to find new jobs when they change jobs or look for suitable jobs. Job creation and destruction creates the need for people to look for jobs and for firms to look for employees, and as such there is a time lag. Also students who have finished studying and are looking for a job also tend to be frictionally unemployed.

Conclusions

In conclusion, on balance, the dominant cause of unemployment in Singapore is likely to be cyclical unemployment because the economy is dependent heavily on external markets and thus the effects of global recession would impact unemployment in Singapore heavily. With a global recession (especially during 2008-2010), a fall in global income results leading to lower purchasing power, with a fall in consumption and net exports assuming that demand for exports and important are both price elastic. The concomitant poor business sentiment would result in falling investment, and AD would fall further. Fewer goods and services are demanded and as a result firms would then retrench workers thus causing cyclical unemployment.

JC Economics Essays - Tutor's Commentary: This H2 Economics essay on Singapore's unemployment is very well written and addresses the economics question pertinently, and would get rather high marks. It is clearly written, direct, and answers the question posed. Always remember to answer what the question is asking for, and not what you imagine the question to be asking you. This tip can prove very valuable in examinations. Ask yourself a few questions: how can this economics essay be improved, and made even better? What would I have done differently or similarly? Thanks for reading, and cheers!