R1: One external cause of unemployment can be due to the trade war between US and China.

Fall in (X-M): When the latter occurs, this may take the form of the US imposing tariffs on imports from China.

Example: For example, when a tariff of 100% is imposed on Chinese EVs in USA. This increases the domestic prices of imported Chinese EV. This leads to an increase in price for US consumers, causing the demand for such imports to fall. Hence, import expenditure fell for the US. This will result in a fall in demand for exports from China. As Singapore exports intermediate goods to China for their production, this will also cause a fall in demand of exports from Singapore, leading to a fall in nominal export revenue.

[ALTERNATIVE] With higher tariffs imposed on China, this can reduce its exports and slow down the economic growth of China via the reverse multiplier effect. As the national income of China falls. This will lead to a fall in willingness and ability to consume imports, hence reducing their demand for imports. This will lead to a fall in nominal export revenue.

Graphical Analysis:

As seen in the graph above, expectations of lower prices in the future will lead to a fall in AD, represented by the leftward shift of the AD curve from

AD1 to AD2.

Reverse Multiplier Effect: Assuming that the state of the economy is below the level of full employment, the initial fall in AD will result in an unplanned rise in inventories, which in turn signals to firms to decrease output. Hence, firms will decrease their output by using fewer factors of production, such as labour. This leads to a fall in demand of labour, causing a surplus of labour, driving wages down. The fall in output and employment and fall in income will lead to households being less willing and able to consume domestic goods. This induces further decreases in domestic consumption and increases in inventories by firms via the reverse multiplier effect. AD will continue falling until injections = withdrawals. Overall, AD falls from AD1 to AD2 and overall multiplied decrease in real GDP from Y1 to Y2.

Link to cyclical unemployment: Due to the decrease in AD and output, leading to a rise in unplanned inventories. Firms will respond by reducing output, thus they will demand lesser labour, leading to a fall in employment opportunities and a rise in displacement of labour, leading to a rise in cyclical unemployment.

R2: One domestic form of unemployment can be due to the advent of new technology, such as AI and digital transformation, leading to structural unemployment.

With the emergence of new technology such as AI and digital transformation, low skilled workers can be displaced or retrenched as they are being replaced by more efficient and less costly machineries. This will lead to a fall in willingness and ability to hire low skilled workers, leading to a fall in demand of low skilled workers, as such causing low skilled workers to be displaced.

This low skilled workers being displaced from sunset industry, may lack the skills the employers in the sunrise industry are looking for, leading to them to remain unemployed, hence causing structural unemployment.

Graphical analysis
As shown in the diagram above, there is a fall in demand for workers from D1 to D2, leading to a surplus of workers at the initial wage rate W1 and Qdd of workers falls from Q1 to Q2. With fewer Qdd of low-skilled workers, low-skilled workers are displaced.

These unemployed workers lack the relevant skills to find employment in sunrise industries, resulting in a mismatch of skills between the unemployed and the skills demanded by other employers in the sunrise industry.

For example, low-skilled factory workers are retrenched when firms adopt automation in the production lines. However, those retrenched do not have the skills to work in jobs required in the high-tech sectors. As a result, occupational immobility occurs as workers cannot move to other industries, giving rise to structural unemployment.

Model Essays & CSQ Answers

Explain one domestic and one external cause of unemployment in Singapore. [10]

How to Learn from Model Answers