Causes of Unemployment Across Countries, and How the Nature of an Economy Shapes Policy Choice

Answer

Part (a) — Causes of unemployment across countries [10]

Unemployment is the situation where people able and willing to work cannot find suitable employment. Its types have distinct causes.

Cyclical (demand-deficient) unemployment. In a recession, aggregate demand is insufficient to buy the full-employment output. Firms cannot sell at the current price level; after running down stocks, they cut production and, because labour is a derived demand, employment. In Samoa, a weak global outlook cut foreign tourism spending — a fall in exports — lowering AD and national output, raising cyclical unemployment.

Structural unemployment. Structural unemployment arises from a mismatch of skills when an economy’s structure changes. A permanent fall in demand for an industry’s output (e.g. traditional photo printing displaced by digital) cuts labour demand, and occupationally immobile workers cannot transfer. On the supply side, labour-saving technology — automation in US manufacturing — displaces workers whose skills no longer match available jobs.

Frictional unemployment. Frictional unemployment is the time taken to match job-seekers with vacancies, arising from imperfect information in the labour market. It tends to rise in booms as workers seek better positions.

Seasonal unemployment. Demand for certain labour fluctuates with the seasons — agricultural harvest workers, tourism and construction tied to climate or events — leaving such workers idle off-season.

Part (b) — Does the nature of the economy shape policy choice? [15]

The thesis is that the nature of the economy significantly shapes policy choice for cyclical unemployment, but matters far less for structural and frictional unemployment, where the root cause dominates.

Thesis: nature of economy matters for cyclical unemployment. Large, less-open economies (USA, China) have big domestic markets, so consumption is a large share of GDP; their governments rely on demand-management tools acting on C — the US Federal Reserve cuts interest rates and the government cuts income taxes, and with a large multiplier these are effective. They can also use protectionism to switch expenditure toward domestic goods. By contrast, small, open economies (Singapore) depend on net exports and investment, so they use exchange-rate policy: in a recession the MAS depreciates the dollar, and — provided the Marshall-Lerner condition holds — net exports and AD rise, lowering cyclical unemployment, alongside expansionary fiscal policy. Limitations: in a deep slump, weak confidence makes consumption insensitive to interest-rate cuts; protectionism invites retaliation; and depreciation imports cost-push inflation for an import-dependent economy.

Anti-thesis 1: root cause matters more for structural/frictional unemployment. Regardless of size, both economy types use supply-side policy for structural unemployment — retraining subsidies and grants (Singapore’s SkillsFuture-type schemes; US Department of Labour programmes) to raise occupational mobility — and job-matching services (labour exchanges, job fairs) for frictional unemployment. Here the root cause, not the nature of the economy, drives the choice.

Anti-thesis 2: macroeconomic conflicts also shape choice. In both economy types, demand-management to cut cyclical unemployment eventually generates demand-pull inflation near full employment, worsening export competitiveness and the balance of payments. To minimise this conflict, both turn to supply-side policy to expand capacity, which also serves inclusivity (reskilling the low-income) and sustainability (green technology) — so the conflict of objectives, not just the nature of the economy, conditions the choice.

Judgement. The nature of the economy affects policy choice to a certain extent — decisively for cyclical unemployment, where it determines whether a government leans on interest-rate or exchange-rate policy and how potent fiscal policy is (via the multiplier). But its influence is bounded: for structural and frictional unemployment, the root cause makes supply-side policy the common answer across economy types, and the conflict of macroeconomic objectives further constrains the choice. The most defensible position is that the nature of the economy is a primary determinant only for demand-deficient unemployment; for the rest, the type of unemployment and the government’s fiscal health and priorities matter more.