Wednesday, December 27, 2006

Unemployment (Part 5)

Unemployment (Part 5)

Every wonder why unemployment in some years are higher than others?

Why some countries have lower levels of unemployment rate than others?

Why some countries seem unable to create jobs for its people?

Unemployment is not a simple problem. The cause of unemployment may differ from country to country as evident from the following examples. As you read the extracts, think about how you would classify the different types of unemployment (or employment) in the situations below.

Case 1:

Yasheng Huang, an associate professor at the Sloan School of Management at Massachusetts Institute of Technology, explained: "Basically, in the 1990's, foreign firms based in America, Europe, Japan and the rest of Asia moved their manufacturing operations to China. "
The real losers, it seems, are mostly low-wage workers elsewhere, like the ones at Hitachi who lost their jobs in Japan, along with workers in other parts of Asia who suffered as employers began relocating plants to China. Blue-collar workers in the United States have also lost out.
(The New York Times, Feb 2006)

Case 2:

Labour markets rarely function perfectly. But Germany’s labour market is not really a market at all. It abjures free competition, which it likens to the law of the jungle. Firing is a last resort. Wages are negotiated collectively. These clubby, consensual arrangements served Germany well for several decades after the war, winning the country an enviable industrial peace. But they have now become, in effect, a conspiracy of insiders against outsiders. The 5m outsiders, who lack a job, might be prepared to work for less than those who have a job. But employee protections and union rules insulate the insiders from any competitive threat the outsiders might offer. As a result, the insiders maintain wages above the level that would make it profitable for employers to hire those out of work.
(The Economist, Feb 2005)

Case 3:

The German economy is close to recession, and the number of unemployed remains stubbornly above 4 million.
"Every worker should be willing, in order to help secure his or her job, to give up three to four holidays per year," said Mario Ohoven, president of the country's Small Business Association. "Germany can't afford to have the highest labour costs in Europe and at the same time the greatest number of holidays," he said.
(BBC News, 2003)

Case 4:

Globalisation has intensified the problems facing UK manufacturing businesses. In many traditional industrial heartlands, rising import penetration and a switch of manufacturing to lower-cost production centres in South-east Asia and Eastern Europe has caused a fall in output and many thousands of lost jobs.

Case 5:

We need to confront the fact that automation and technological innovation generally dwarf outsourcing as a source of job churn. Go back as far as you want and you can see a seemingly endless stream of jobs eliminated by technological innovation: longshoremen put out of work by containerized shipping, telephone operators put out of work by computerized switching, factory workers put out of work by robots, bank tellers put out of work by automatic teller machines, receptionists put out of work by voicemail.

Case 6:

The Senior Minister traditionally uses his annual National Day Dinner at Tanjong Pagar to speak frankly about the big problems facing the nation. And this year, his top concern is unemployment. It's almost 5%, and there are 85,000 people out of work.
"Is it our fault? What have we done wrong? Have we become lazy? Have we become less productive? Alas we are not to blame," he said. The world has changed, and Singapore's products and services - like its port and national air carrier -- are now no longer as competitive as those of low cost countries.
(CNA, Aug 2003)

Case 7:

Singapore's economy expanded for a fourth straight quarter, adding to evidence that global demand for digital music players and laptop computers made in Asia is fueling growth in the region. Companies including Seagate Technology Inc., the world's biggest maker of computer disk drives, are expanding in Singapore to meet orders. Such an expansion is fueling jobs growth and wage increases, boosting consumer spending, economists said. The jobless rate fell to 2.5 percent in the fourth quarter, the lowest in 4 1/2 years.
(Bloomberg News)

Case 8:

"We're incredibly short of people now,” Yoshiko Shinohara president of Tempstaff Co., Japan's second-largest temporary staffing agency, said in an interview. “With the economy improving, we're having trouble keeping up with the surge in demand."
(Bloomberg News)

Stop and check

The 5 key sources or types of unemployment are described below. Which type of unemployment do you think the 8 situations described above fit into?

The key types of unemployment

1. Cyclical unemployment is involuntary unemployment created by business-cycle recessions. Workers do not have jobs because aggregate demand and production in the economy are down.

2. Seasonal unemployment is relatively regular (read this as predictable) unemployment tied to a particular job. It is termed seasonal because it often occurs during particular seasons of the year.

3. Frictional unemployment is temporary unemployment created when workers switch jobs. The key with frictional unemployment is that the number of workers is equal to the number of jobs, it just takes time and information to match them up.

4. Structural unemployment is relatively permanent unemployment created because the skills of the workers are not the same as the skills needed on the job. Again, an equality between the number of workers and jobs exists, there is just a mismatch of skills.

5. Real wage (or classical) unemployment occurs when real wages are higher than the market-equilibrium wage. In simple terms, institutions such as the minimum wage, by raising the cost of hiring above the revenue generated when the additional worker is hired, deter employers from hiring all of the available workers.

Source and further reading:
1. Amos Web (http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=unemployment%20sources)
2. Wikipedia (http://en.wikipedia.org/wiki/Unemployment_types)
3. Tutor2U (http://www.tutor2u.net/economics/content/topics/unemp/unempcause.htm)

Friday, December 01, 2006

Unemployment (Part 4)

Why should we be concerned about unemployment?

Over 5m Germans were without a job in January 2005, more than at any time since the Great Depression and more than the total population of Singapore!

Below is an anecdotal account of Sylvia Aldorf, 35, who has been unemployed for more than four years.

Despite completing many training courses over the last few years, so far she has had no luck. "I've applied for lots of jobs, and different kinds of jobs as well - in the medical service, administration, health service, but there's no chance…It's very frustrating because you write dozens of job applications and you never get an answer. Sometimes, but only occasionally, I receive an answer, but more often than not, my application seems to disappear."

But by 2006, things were beginning to look up for Germany. Economists are starting to take an interest in the possible economic impact of the 2006 World Cup coming to Germany this summer and the forecasts seem to suggest that Germany will enjoy a temporary boost to demand, incomes and jobs as the tournament unfolds. Upwards of a million supporters are thought to be going to Germany and the boost to spending in hotels and retailing will be noticeable. It is estimated that the number of overnight stays in German hotels and hostels will rise by over 5 million and the average fan will have a spending budget of around Euro 150 per day. Economists at Deutsche Bank have estimated that up to 60,000 new jobs will be created as a direct result of the World Cup.

Why should we be concerned about unemployment? Why do unemployment news typically make it to newspaper headlines?

(1) Personal hardships

for those who lost their jobs and their families & a possible loss of self-worth.

(2) Lost production and lower standard of living

the output that the society produces is less than what it is capable of producing when resources (in this case labour) are left idle, without work. Do not think that unemployment hits only those who lost their jobs. There is a MULTIPLIER EFFECT that ripples to the rest of the economy. High unemployment stops consumers from spending, and reduces the overall buying power. Businesses see the demand for their products and services falling and invest less. If losses are made, they will have to shut down and retrench their workers. The overall result is even less economic growth.

(3) Lost tax revenue and additional government expenditure

government collects less tax revenue when unemployment is on the rise. Why and what are the consequences?

Not only do governments collect less revenue, they have to spend more in periods of rising unemployment. In some countries, the unemployed are entitled to unemployment benefits.

Recommended reading:
Japan on suicide alert
Japan's worst recession in 50 years is being linked to the country's highest ever suicide rate - notably among middle-aged men. In one case, a tyre company worker who felt pressured into early retirement stabbed himself to death in the company president's office.

German unemployment weighs on voters
Many of the jobless say that being unemployed makes you feel unwanted and useless. Some have strategies to cope with the lack of focus in their lives. Others just give up.

Thursday, November 30, 2006

Unemployment (Part 3)

What do unemployment statistics say? Not very much sometimes.

United Kingdom

It has been a bad news month for British industry. First MG Rover collapsed, with 5,000 workers losing their jobs. Then IBM announced that it is cutting 13,000 jobs in Europe, 1,500 of which are expected to go in the UK. ABN-Amro, in a gloomy report on jobs, last week predicted 500,000 would go over the next three years, in retailing, manufacturing and construction.
Business Times

United States

Between 1993 and 2002, total U.S. employment went up by about 18 million jobs. During the same decade, we created 328 million jobs and eliminated 310 million. So during the boom time of the 1990s, roughly 30 million jobs a year were destroyed. About half of those were seasonal jobs that had actually been created that year. So when you're looking at layoffs, it's about 15 million layoffs a year, even in good times. US-based research institute CATO

Learning points:

(1) Not all job losses add to higher unemployment rate

While the reports above paint a grim picture of the unemployment situation around the world, please remember to keep the whole problem in perspective. Yes, many people have been retrenched as we see in the UK case but it does not necessarily mean that they will remain unemployed. It should be clear from the CATO report that while people lose their jobs from retrenchment, there may be job opportunities open to them in other areas.

(2) Inaccuracy of official unemployment statistics

The imperfections of official unemployment statistics fall into two categories.

a. The “true" unemployment exceeds the official unemployment rate

Two items that show up in the understated category are discouraged workers and part-time workers.

Discouraged workers are people who are willing and able to engage in productive activities, but due to their overwhelming lack of success have stopped seeking employment. Discouraged workers believe that any effort to find a job will be fruitless. And because they have stopped seeking employment, they no longer count as “unemployed” although given the opportunity, they would have taken up a job.

b. The "true" unemployment is less than the official unemployment rate

Two items that show up in the overstated category are unreported legal employment and unreported illegal employment.

There are many job-holders who do not report their status for purpose of tax-evasion and CPF-evasion. Others do not report simply because they can’t. Take for example those people selling pirated VCDs or the bookies taking bets illegally for horse racing.

For details on the problems of measuring unemployment, please follow this link. A very good place to learn some economics on your own.

Source: UNEMPLOYMENT RATE, MEASUREMENT PROBLEMS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2006. [Accessed: November 28, 2006].

Tuesday, November 28, 2006

Unemployment (Part 2)

Unemployment Rate

The preliminary estimate of the unemployment rate in Singapore for the month of September 2006 stood at 2.7%, according to the Ministry of Manpower.

The Bureau of Labour Statistics in the US reports an unemployment rate of 4.4% in October 2006.

The table below provides a summary of the unemployment rates in selected countries in the period 1994 to 2003.

Sources: OECD Factbook 2005,
Singapore Ministry of Manpower

Question 1: How is the unemployment rate calculated?

In the examples above, it is evident that unemployment rate is expressed as a percentage figure. What does it mean to have an unemployment rate of 2.7%? 2.7% of what?

Hint: Clues can be found in the explanatory notes of
1. Ministry of Manpower
2. US Bureau of Labour Statistics

Question 2: Unemployment rate in the UK rose even though more people are employed. How is it possible?

The UK National Statistics office reported in 2006 that the trend in the employment rate is broadly flat while the trend in the unemployment rate continues to increase as evident from the graph below.

2a) How can employment rate remain “broadly flat” (i.e. stays roughly constant) while unemployment rate rises?
2b) The report also mentioned that the number of people in employment in September 2006 was up by 192,000 compared to a year ago but that the employment rate fall by 0.3%. Just how is this possible?

Hint: You might find clues in the original report.

Question 3: Unemployment rate dropped but “it is going down for the wrong reasons”. What are these “wrong reasons”?

Unemployment rate dropped to 5.7% in December 2004 to the lowest level in 14 months. “The rate is going down, but it is going down for the wrong reasons,” said Bill Cheney, chief economist at John Hancock Financial Services, noting that it fell not because people were finding work. “That doesn't make you feel really good about the state of the jobs market.”

So what is behind the fall in unemployment rate if it is not because people are finding work?

This is what the Washington Post has to say:

The 0.2 percentage point drop in the jobless rate occurred because fewer people were looking for work, the Labor Department said Friday. More than 300,000 people gave up their search for jobs and dropped out of the pool of available workers.

Monday, November 27, 2006

Unemployment (Part 1)

Economic Status

In Singapore, persons aged 15 years and over are classified as either economically active or economically inactive.

Economically active

Economically active persons refer to persons who were working and those who were actively looking for work if not working during the reference period.

a. Economically active (working)

A working person is one who during the reference period, worked for pay or profit. It includes all those who had a job but were on leave during the Census, serving national service, as well as those who worked in a family business without fixed pay.

Economically active (not working)

An unemployed person is one who was not working during the reference period but was actively looking for work or planning to start his own business.

Economically inactive

Economically inactive persons refer to persons who were not working and not looking for work during the reference period. They include housewives, students, pensioners, retired and disabled persons and persons with private means.

Economically inactive (housewives)

This refers to persons who are engaged in household work without pay.

Economically inactive (students)

This refers to persons who attend educational institutions such as schools, colleges or universities on full-time basis.

c. Economically inactive (others)

This refers to all other economically inactive persons such as those who are retired, too old to work, disabled persons and persons with private means (these are the people too rich to want to work). Prisoners, patients of mental hospitals, inmates of homes for the aged as well as those who are awaiting call-up for national service are included in this category too.

It should be clear from the diagram above that an unemployed person:
1. must be actively looking for work
2. if he is not actively looking for work (e.g. housewives, students, retirees, disabled people, etc) he is not counted as unemployed

True or false?

When employment increases, unemployment must fall.
[Hint: study the diagram above]

The answer, surprisingly, is not necessarily.

It is possible that the unemployment does not fall even when more people find jobs. A look at the 2 figures below reveals why.

Situation 1: Employment increases, unemployment falls

Situation 2: Employment increases but unemployment does not fall

By the same reasoning, a decrease in employment does not mean that unemployment is necessarily on the rise. How would you explain this?

Sunday, November 26, 2006

National Income (Part 4)

Significance of national income figures

Why is there so much attention given to the national income figures of a country? Newspapers report the figures, government officials talk about GDP growth, even secondary school textbooks mention them.

GDP or GNP figures are important because they are a proxy to the standard of living in a country.

We all want a high standard of living, i.e. to enjoy good housing, good food, buy the latest tech gizmos, the occasional overseas holiday, quality healthcare provided at our clinics and hospitals, etc. This is our aspirations and forms part of our expectations on the government – to be able to give the citizens a high standard of living.

But how do we know that a country’s standard of living has improved over the years? How do we know if the standard of living in one country is higher than the standard of living in another? Recall that the GDP of a country is defined as the value of goods and services that are produced within the geographical boundaries of the country in a year. These goods and services might possibly include things like housing, computers, cars and libraries. The higher the GDP figure, the more of such goods and services produced and the higher would be the standard of living we enjoy.

Questions to ponder:

1. Using the expenditure approach, we arrive at the national income of a country by measuring the total expenditure (or spending) in a year. But does a country that spends more on goods and services have a higher standard of living than a country that spends less on goods and services? Why or why not?

2. China has overtaken the UK to be the world’s fourth largest economy. What this means is that the GDP of China is larger than UK. A UK paper The Guardian has this to say “China's GDP is now 18.2 trillion yuan (£1.3 trillion), which - depending on a slight fluctuation in exchange rates - surpasses estimates for Britain and France last year. The United States, Japan and Germany are considerably bigger, but China is catching up fast.” (read full article
) But do the Chinese people have a higher standard of living than the British or the French? Why?

If the two questions above have set you thinking, you will soon realise that useful as it might be, the GDP figure is only a proxy indicator of the standard of living. It gives us some fuzzy idea of how well-off the people in the country are but does not give us the whole picture. There are limitations in the use of GDP figures to measure the standard of living in a country and to compare the standard of living between two countries.

Further reading:
1. Measuring Standard of Living
2. Data Problems
3. Limitations of GDP

Saturday, November 25, 2006

National Income (Part 3)

Measurement of National Income

Singapore’s nominal GDP in 2005 stood at $194,359.8m. Just how do we arrive at this figure?

"One person’s spending is another person’s income." This sums up the concept of the Circular Flow of Income. Someone spends, this money becomes the income of the next person. Using the income earned, this second person goes shopping, buys some things and this creates income for the third person…. So the money goes round and round the economy, creating income for many people and when added up, this gives the national income.

So to measure national income, we can either (1) add up how much each person in the economy spends or (2) add up how much each person in the economy earns. The first method of measuring national income is the “expenditure approach” and the second method the “income approach”.

There is a third method called the “output approach” or the “value-added approach”. Quite simply, the amount of expenditure must equal to the value of the output that the economy produces. So to get the national income, we can also add up the value of final goods and services that the economy produces in a year.

In theory, the 3 methods should give the same value of national income but due to errors and difficulties in data collection, there tends to be discrepancies in the values and we have to make adjustments for such differences when we calculate and present the data.

We will be revisiting the expenditure approach in greater detail at a later date.