NJC H2 Economics Prelim P2 Ans

National Junior College 2023 SH2 H2 Economics Preliminary Examinations Paper 2 Section A – Essay Questions 1 A construction firm in Singapore is facing an incre ase in demand for residential properties which has led to an increased demand for labour. However, the construction industry has an increase in the attrition rate of their foreign workers, with aroun d one in three returning home after the borders reopened post COVID-19. This creates a problem for the construction industry where demand for labour is also inelastic. (a) With the aid of a diagram, explain how a firm’s tot al expenditure on its workforce will have changed as a result. [10] (b) Discuss whether changes in foreign worker levy is l ikely to be a better way than productivity improvements to address the labour shortage experienced by a construction firm. [15] Part (a) suggested answer Introduction  The equilibrium wage rate and the equilibrium quan tity of labour in the market for labour is determin ed by the interaction of the demand for labour and the supply of labour. o The demand for labour is a derived demand, depende nt on the demand for the firm’s final goods and services.  The change in the firm’s total expenditure on its workforce will depend on the extent of the change i n demand, supply of labour and the price elasticity of demand for labour.  The total expenditure on the firm’s workforce is e qual to the equilibrium wage rate multiplied by the quantity of labour demanded. Body: Assuming that the firm is a price taker who follows the equilibrium wage rate determined by the interaction of the demand for labour and the supply of labour in the labour market. Demand factor  There is increasing demand for residential propert ies in Singapore. The rise in demand for residential properties could be due to the expectations of future prices. As most households anticipate that property prices might rise, this had led to a higher speculative demand for res idential properties. In addition, with more inflow of foreign talents, this had added to the demand for residential properties.  Given an increasing demand for residential propert ies in Singapore, the construction firm is experiencing a rise in the demand for its goods.  Since labour is a factor input, more labour will b e required to produce more houses and there will be an increase in the demand for labour  This is illustrated by the rightward shift of the demand curve for labour from DD0 to DD1 in Figure 1.  A shortage is created (Q sQd).

Figure 1: Increase in demand for labour  With the increase in demand for labour, the firm w ill now employ 0Q 1 workers at the new equilibrium wage rate, W1.  Total expenditure on labour is now 0W 1E1Q1.  With the increase in demand for labour, the firm’s total expenditure on labour increased. Supply factor  The industry has an increase in the attrition rate of their workers, with around one in three returning home after the borders reopened, reducing the number of worker s available to the firm.  This will cause a decrease in supply of labour rep resented by a leftward shift of the market supply c urve, from SS 0 to SS 1.  A shortage is created (Q dQs). Figure 2: Decrease in supply for labour  In the construction industry, labour is still requ ired in the building of houses. Hence, the high deg ree of necessity for labour in the industry has led to the demand for labour being wage inelastic. Given that the demand for labour is (wage) inelastic, the increase in wage rate will bring about a less than proportionate decrease in quantity of labour demand ed. Hence, total expenditure on labour has increased from area 0W 0E0Q0 to area 0W 1E1Q1. Conclusion • Unambiguously, given an increase in demand for la bour and decrease in supply for labour – the firm’s total expenditure on labour increased.

Part (b) suggested answer Introduction  A foreign worker levy is a monthly fee imposed by the Ministry of Manpower on the hiring of each foreign worker employed by firms and who are issued with a work permit.  The government could make changes to the foreign w orker levy as well as the use of other strategies, such as providing training to current workers to increase l abour productivity and to employ labour-saving meth ods of production, for e.g. technology and automation to a ddress the problem of labour shortages faced by firms. Body Thesis: Reduction of foreign workers levy is effective in addressing the labour shortages The foreign worker levy is a pricing mechanism to r egulate the number of foreign workers in Singapore, acting like an “import duty” (a tax to discourage overdependence of foreign workers by firms in Singapore). The foreign worker levy is a flat sum per worker im posed on firms hiring these work permit holders. He nce, the foreign worker levy increases the marginal cost incurred with each additional worker employed. Lowering the foreign worker levy will lower the mar ginal cost of hiring an additional foreign worker. With lower labour costs due to reduced levies, construction companies might be more inclined and have lower barrier to h ire foreign workers, thus increasing the available workforce in the industry. As companies are more inclined and lower barrier to hire foreign workers and are bringing in more foreign workers, the influx of foreign labour adds to the current total labour force in the construction industry, thus increasing supply of labour to construction industry. With the increase in supply of labour to construction industry, the firm will now be able to employ a higher number of foreign workers, from Q 1 to Q 2 as seen in Figure 3, to relief the labour shortage s faced and can be an effective strategy to address the labour shortages experienced by such firms. Figure 3: Labour Market in Construction Industry Limitations of policy  The demand for foreign worker is relatively price inelastic for the construction industry. There is a high degree of necessity to use labour in the construction industry (i.e. painting of exterior walls) and there are few substitutes available for low-skilled foreign workers as most o f the local labour workforce among Singaporeans are mid to high skilled. o A decrease in foreign worker levy to increase the supply of labour. o Given that the demand for foreign worker is relati vely price inelastic, when the cost of hiring the foreign worker has decreased, the quantity demanded for labour will only increase by less than proportionately. o Hence, the shortage of labour in the construction industry will still persist. Anti-thesis: Productivity improvements are also effective in addressing the labour shortages Alternative policy 1: Productivity improvements via usage of technology

 To allow for less manpower-intensive construction, HDB has been innovating and coming out with labour-saving production processes.  The government can encourage firms to invest in te chnology such as more productive machineries to imp rove their production process. o For example, Singapore government adopts the Produ ctivity Solutions Grant. This grant helps companies adopt technology solutions to improve pro ductivity and enhance business processes. This will reduce the reliance on labour as a factor of production as more productive capital substitute workers in various stages of production, thus addressing the labour shortages.  Hence, using productivity improvements, this reduc es the need for labour and demand for labour reduce s, addressing the shortage of labour. Alternative policy 2: Productivity improvements via training of labour  To overcome the problem of labour shortages, firms can attempt to increase labour productivity inst