Concept of Unemployment

Question: Write an essay about the Unemployment. Answer: Concept of Unemployment: Unemployment is characterized as a situation when there is someone who belongs to the working age group and is actively searching for a job but is not able to find a job (Leduc and Liu 2012). The term unemployment sometimes is used as a health indicator of an economy. Unemployment rate is considered as the most suitable measure of unemployment. Unemployment can broadly be divided into a number of categories, such as demand lacking unemployment, structural unemployment, real wage caused unemployment, frictional unemployment and voluntary unemployment (Mankiw 2014). These are explained one by one below, Structural Unemployment: Structural Unemployment is considered as one of the major types of unemployment prevalent within an economic framework. It is strictly focused on the structural problems associated with an economy and the labor market inefficiencies. Structural unemployment is said to occur whenever the labor market is incapable of providing jobs to each and every person who is seeking employment (Tanveer et al. 2012). The mismatch between the skills that are possessed by the unemployed worker and the skill requirement of the vacant position gives rise to his structural unemployment. In order to provide an example, an instance can be considered. Such as whenever an economy is experiencing a long-term unemployment situation, it is quite evident that the skills of the individuals will become obsolete (Kapetanios et al. 2012). Therefore, whenever the economy recovers from the situation the skills of the labor may be unfit for the requirements of the new jobs because of their long term inactivity. Frictional Unemployment: Frictional Unemployment is characterized as another category of unemployment that can be found in an economy. It is defined as the time span between employments, that is when the individuals are searching for jobs or individuals are within a transitioning stage between one job to the other. According to Ostry et al. (2012), frictional unemployment is that type of unemployment, which is always present within an economy to some extent. The mismatch between the workers and the jobs gives rise to this frictional unemployment. The mismatch may be associated with payment, job satisfaction, working hours, location and many more. The frictional unemployed is determined by the individual assessment of the work or service provided by the individuals compared with the current wage rate that he individuals receive (Blinder 2013). Cyclical Unemployment: Cyclical unemployment is said to occur when there is not sufficient aggregate demand present within an economy, which is necessary to offer jobs to everyone who is looking for recruitment. Within an economy whenever the demand for goods fall, production is reduced and need for workers is reduced (Christiano et al. 2013). Hence, when there is cyclical unemployment within an economy quantity of unemployed workers is larger than that of the number of recruitment opportunities. Concept of Inflation: Inflation refers to situation whenever there is a continual rise in the general level of price within an economy. Therefore, price rises means an increase in the level of cost of living. In other words, inflation means a continual rise in the general level of price and thereby decreasing the purchasing power of the currency (Campbell et al. 2012). As inflation is not uniform across the economy during all the time, it can be distinguished in various types. The basic two types of inflation are demand-pull inflation and cost-push inflation. Demand Pull inflation: A boost in the level of collective demand above the intensity of available production gives rise to an increase in the price. This type of inflation termed as the demand-pull inflation. According to Treasury (2016), this rise in the level of aggregate demand is associated with money supply. If money supply within an economy overshoots the amount of available goods and services within an economy, demand-pull inflation arises. According to Gordon (2013), demand-pull inflation arises when too much money chases too few goods. Figure 1: Structural framework of Demand-Pull Inflation (Source: Created by Author) However, according to the Keynesian economists there may be an autonomous increase in the level of aggregate demand or aggregate spending. That is an increase in the consumption demand, level of investment or government expenditure or increase in net exports. Therefore, according to the classical economists demand-pull inflation is caused by monetary factors while according to the Keynesian economists it is caused by non-monetary factors (Johnston 2012). The demand-pull inflation can be explained with the help of the following diagram. In the diagram below, output is measured on the horizontal axis and price level is depicted by the vertical axis. In range 1, the total spending is much lower than that of the full employment output, YF. The price level increases nominally or negligibly (Leduc and Liu 2012). Therefore, there is an increase in the level of demand output will rise. Hence, the economy enters into the range 2, in range 2 output is nearly equal to the full employment condition. From this region onwards, price level starts to rise. Finally, the full employment situation is achieved in range 3, here the price level increases regardless the fact that output does not rise. This situation is characterized as the condition of demand pull inflation. Figure 2: Demand Pull Inflation (Source: Created by Author) Cost Push Inflation: An overall increase in the cost of production may give rise to inflation and this is popularly known as the cost-push inflation. The reasons behind an boost in the expenditure of production may be increase in the price of raw materials, labor wages etc. Sometimes trade unions are held responsible for increase in the remuneration rate (Watson 2014). Whenever there is an increase in the wage rate it is quite evident that the cost of production will increase and as a result price of the commodities will increase. In the case of cost-push inflation, a wage price spiral comes into action. However, firms are also blamed for this price rise at the same time as these firms simply increase price for raising their profit margins. Therefore, the cost-push inflation possesses two important components such as the wage push inflation and profit push inflation. Figure3: Structural framework of Cost-Push Inflation (Source: Created by Author) A.W. Phillips in the year 1958 first distinguished a tradeoff between inflation and unemployment and thereby formulated the famous Phillips Curve. This trade off is distinguished based on the simple assumption that whenever there is a fall in the level of unemployment, workers become able to push for increased wage rate. Now, firms try to shift this increased wage cost over the consumers, giving rise to an inflationary situation within the economy (Gaertner and Wenig 2012). The trade off as pointed out by Phillips suggests that the policymakers should focus on either low inflation rate or lower unemployment, however, not both. Therefore, according to Phillips, when unemployment decreases inflation increase on the contrary, when unemployment increases inflation decreases. The government of Singapore plays a crucial role in controlling the short run instability caused inflation and unemployment. The concept of Consumer Price Index (CPI) is used for measuring inflation. In Singapore, the consumer price index is comprised of more than 6500 brands of goods and services that are purchased commonly by the households. The components of consumer price index are often influenced by the cost associated with imported goods while on the other hand some other components are affected by pressure of domestic cost (Cleaver 2013). The government of Singapore has adopted a number of steps in order to mitigate the adverse effects of inflation. The Monetary authority of Singapore has allowed the dollar of Singapore to appreciate so that the economy can cope up with the increased prices of imports associated with food products and oil. In order to keep the prices of the processed food products in control, the National Environmental Agency (NEA) has decided to adopt certai n management models that will help to hold these costs at a lower level. In order to provide example an instance can be considered such as, a social cooperative like NTUC foodfare had been appointed for establishing the operability of the new Bukit Panjang Hawker Centre on a nonprofit basis (Cleaver 2013). In association with this the Retail Price Watch Group (RPWG), leaded by the Senior Minister of State for trade and Industry and National Development, monitors if there is any excessive rise in the price level of any food products or any other necessary goods. In the context of non prepared food products the Retail Price Watch Group has worked with the supermarkets, retailers, hawkers as well as various food courts for the promotion of availability of cheaper alternatives. Moreover, the RPMGs member of supermarket such as the NTUC Fair Price and Sheng Siong have held the lower prices of their home brand products for helping the consumers to cope up with the excessive price rises (Choudhry et al. 2013). On the other hand, the housing prices do not contribute in the CPI inflation. It is mainly concerned with the young families those yet do not own a house. In this context the Ministry of National Development has adopted necessary steps in order to boost the supply level of Boost to Order HDB flats along with the properties built for private residential purposes (Choudhry et al. 2013). The subsidies that are provided for the HDB flats are reviewed on a regular basis in order to ensure the affordability of public housing and that too especially for the buyers who are buying a house for the first time. Again, the government of Singapore has also adopted a number of demand management policies, which will in turn continue to monitor the market for housing quite closely. In order to manage the effects of tight labor market, the government of Singapore has adopted the policy of working with the unions and companies for raising the productivity. This can easily be achieved by improving the production process of the companies along with motivating the workers to enhance their productivity. If productivity is increased the firms will be able to increase the wage of the workers and will be able to deal with the higher costs associated with business, without passing the increased costs over the customers. The achievement of the government of Singapore is that, it has succeeded in maintaining the unemployment rate in the economy at a significantly lower rate of 2% since 2010. During 2013, it had gone further below to 1.9% (Choudhry et al. 2013). For maintaining this low level of unemployment, the government of Singapore has adopted a number of policies including demand side policies and supply side policies. Fiscal policies is one of the demand side policies and it can decrease unemployment by raising the aggregate demand and the rate of economic growth as well. The government has implemented expansionary fiscal policy to deal with the unemployment problem (Choudhry et al. 2013). It has reduced taxes and increased the government spending. Lowering of the taxes in turn increases the disposable income of the individuals and thereby induces the individuals to increase consumption. If there is an increase in the level of aggregate demand, real GDP will also increase. Therefore, the firms will increase production level and as a result demand for labor will also increase. Hence, this will help to reduce the demand deficient level of unemployment (Watson 2014). Supply side policies for dealing with the problem of unemployment have also been adopted by the government of Singapore. This includes educating and providing training to the individuals, providing employment subsidies and improving the geographical mobility as well. the government has provided training to the individuals so that they can find new jobs and develop their set of skills so as to meet with the newer requirements in the job. Again firms may sometime provide lower taxes for being employed for a longer duration (Watson 2014). Therefore, it can easily be said that the government of Singapore has played a significant role in controlling the adverse effects caused by unemployment and inflation. Reference List Blinder, A.S., 2013. Economic policy and the great stagflation. Elsevier. Campbell, J.R., Evans, C.L., Fisher, J.D., Justiniano, A., Calomiris, C.W. and Woodford, M., 2012. Macroeconomic effects of federal reserve forward guidance [with comments and discussion]. 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