HCI Prelims 2013

HCI Prelims 2013

Cyclical Unemployment

Cyclical unemployment is caused by a lack of demand in the downswing of the business cycle. During the downswing (recession or depression), aggregate demand decreases and firms find they cannot sell all their current output and so there is an unplanned accumulation of inventories. Firms will then adjust to the deficiency of demand by cutting back on production and hire fewer workers, leading to an increase in cyclical unemployment. Therefore, cyclical unemployment is sometimes referred to as demand-deficient unemployment.

In the recent Global Financial Crisis (US sub-prime mortgage crisis) in 2008/09, the economy went into sharp contractions as a result of these external shocks. These shocks badly affected our export trade with the rest of the world, tourism and international banking as well as financial services sectors. In short, components of AD were negatively affected.

Furthermore, exports from Singapore are dominated by high-end manufactured goods and services which tend to have a high income elasticity of demand, falling global income thus had pronounced adverse effect on the global demand for Singapore’s exports. As AD falls, firms will recognise the fall in the demand for their goods and services. This will cause them to cut back on production and thus reduce their employment of factors of production like labour. In so doing, it gives rise and worsens cyclical unemployment in Singapore.


Structural Unemployment

Structural unemployment arises from a change in the economic structure of an economy. For example, when an economy changes from an industrial/manufacturing type to a service-orientated one, workers are made redundant in the declining sector, but may not have the necessary skills/knowledge to meet the job requirement in the emerging sectors, or are unwilling to move from one region to another in order to take up jobs in which they have suitable skillsets for. These are cases of occupational and geographical immobility of labour respectively.

In the case of Singapore, there is a decline in her competitiveness in the manufacturing industries. This is due to competition from low-cost emerging countries that have entered the world market. For example, China’s low-cost manufacturing sector and India’s IT software industry have permanently reduced the demand for Singapore’s manufacturing and IT exports. Singapore’s domestic firms in these industries either cut back on production or shut down completely, resulting in the retrenchment of workers. While there are job vacancies available in the sunrise industries of the economy, like the tertiary sectors, these retrenched workers are unable to fill these vacancies due to the lack of necessary skills. This is a case of skills mismatch and occupational immobility, leading to structural unemployment in Singapore.

Structural unemployment is common in Singapore as the country moves from one industry to another due to her changing comparative advantage. As the country moves from the secondary to the tertiary sector, labour finds itself with a mismatch between their skills and the requirements of the jobs in the sunrise industries.


Frictional Unemployment

Frictional unemployment arises because of imperfect information in the labour market as it takes time for job-seekers to be matched with suitable jobs. It is also known as search unemployment. On one hand, job-seekers have imperfect information on the jobs available in the job market, along with the job prospects, job requirement, salaries, benefits, to name a few. On the other hand, firms also have imperfect information on the job-seekers available and their qualities, skillsets, working attitude etc. Since both the firms and job-seekers are trying to find what they deem to be the best match available, time will be taken for job-seekers to be matched with suitable firms. During this period of time, some job-seekers will be frictionally unemployed.

Furthermore, the unending flow of people into (e.g new graduates) and out of the labour force (retirees, women leaving labour force to take care of their children etc), and the process of job creation and job destruction create the need for people to search for jobs and for firms to find suitable employees. This type of unemployment is common in all countries inclusive of Singapore. In Singapore, for example, it is common to see new graduates taking about 3-6 months to find themselves suitable jobs. During this period, they are frictionally unemployed.