MJC H2 ECON EQ4

MJC Preliminary Examination 2011 _ H2 Essay Qn 4 4. Singapore government supply-side policies have created a more dynamic and flexible labour market. Between 2003 and 2008, unemployment fell from 4.0% to 2.2% but inflation rate rose to 6.6%. (a) Explain how supply-side policies can lower the level of unemployment. [10] (b) Discuss whether the Singapore government should ever be concerned about the economic consequences of falling unemployment. (15) CONTENT Candidates should explain how reforms in areas such as education and training, tax/benefit system, labour market reforms ( e.g. Trade Unions) might increase flexibility and raise employment. Supply side policies can improve the way labour markets function by making them more flexible in a variety of ways. Such flexibility has a number of dimensions ( e.g. occupational , locational ) and should resu lt in a more highly-skilled, mobile and employable workforce that is better adapt to a changing economic environment. This is likely to lower the equilibrium level of unemployment (NRU or NAIRU). Knowledge, Application, Analysis and Evaluation Level Descriptors Marks L3 For an explanation of how supply side policies can lower the level of unemployment 7 – 10 L2 For application of knowledge and critical understanding of supply side influences on unemployment 4 - 6 L1 For descriptive knowledge if supply-side policies or a series of relevant assertions relating to falling unemployment 1 - 3 CONTENT Part (b) Answer to this question should discuss the costs and benefits of lower unemployment. Candidates should show awareness of the benefits of falling unemployment (lowering of the costs of unemployment) as well as the problems if unemployment falls ‘too far’. These problems are likely to emerge if unemployment falls below the equilibrium level of unemployment (NAIRU/NRU). The likely inflationary impact of such ‘overheating’ should comment on why rising inflation may be undesirable. Such concerns are likely to be reduced if the fall in unemployment is due to a fall in NAIRI/NRU. Knowledge, Application, Understanding and Analysis L3 For a coherent and balanced discussion of why a government should and should not be concerned about falling unemployment 9 - 11 L2 For an analysis of why a government should OR should not be concerned about falling unemployment 6 – 8 L1 For an application of knowledge and understanding of consequences of falling unemployment. 1 - 5 Evaluation E2 Reasoned evaluation 3-4 E1 Mainly unexplained judgement 1-2

MJC Preliminary Examination 2011 _ H2 Essay Qn 4 b) Discuss whether the Singapore government should ever be concerned about the economic consequences of falling unemployment. (13) Suggested Answer Model (a) Education and  Training Real   output  GPL AS1 AS2 Y1 Y2 AD1 AD2 P1 E1 A P2 Unemployment Definition : People in working age population who are available for work and actively looking for a job but cannot find one.  In the case of Singapore, in recent yrs, the unemployment is largely cyclical (recession) (disequilibrium unemployment) and structural (equilibrium unemployment). Demand deficient unemployment  due to lack of demand  If Aggregate demand for labour equals aggregate supply of labour at the current wage and price level.  no disequilibrium unemployment . However, there is equilibrium unemployment  mainly structural unemployment Supply side policies are used to solve structural unemployment. Supply side policies are designed to influence the aggregate supply (AS) of a country, and effect changes to factors of production in an economy to achieve a country’s macroeconomic objectives Conclusion Supply side policies can improve the way labour markets function by making them more flexible in a variety of ways. Such flexibility should result in a more highly-skilled, mobile and employable workforce that is better adapt to a changing economic environment. This is likely to lower the equilibrium level of unemployment (NRU or NAIRU) as implied by a rightward shift in the AS curve. Supply side policies Explain how reforms in areas such as education and training, tax/benefit system, labour market reforms ( e.g. Trade Unions) might increase flexibility and raise employment. •  shifts the AS curve from AS1 to AS2. • But this has DD side effects (G)  AD shifts right from AD1 to AD2 • At the new equilibrium, prices  from P1 to P2, output  from Y1 to Y2 • Increase in real output  firms increase production  hire more factors of production like labour  increase in employment.

MJC Preliminary Examination 2011 _ H2 Essay Qn 4 Answer Model (b) Cost of lower unemployment Benefits of lower unemployment Economy:  Most significant gain - higher output  Actual economic growth. Less wastage of resources  Less government resources required to restructure the economy to solve unemployment problem  Easier for govt to pursue other development projects  Higher tax revenue from direct and indirect taxes  personal income & corporate taxes  Lower crime levels  Positive correlation between crime rates and unemployment rate  Lower income disparity Conclusion / Synthesis Economy:  Lower unemployment  less spare capacity restrict ability of economy to expand  Lower unemployment can be a problem if it is caused by an increase in demand.  If unemployment falls below the equilibrium level of unemployment (NAIRU/NRU) ‘overheating’ of the economy and inflationary pressure. Illustrate with AS/AD diagram.  Explain why rising inflation may be undesirable.  Worsen Balance of Payments.  Explain why worsened BoP may be undesirable There are benefits of falling unemployment (lowering of the costs of unemployment) as well as the problems if unemployment falls ‘too far’. These problems are likely to emerge if unemployment falls below the equilibrium level of unemployment (NAIRU/NRU). There will be likely inflationary impact of such ‘overheating’, Such concerns are likely to be reduced if the fall in unemployment is due to a fall in NAIRI/NRU. These problems suggest that govt should be concerned when the fall in unemployment went ‘too far’ and results in overheating of the economy. Effects of lower unemployment