Business Economics Assignment 3

Karan Raj Aggarwal

UB Number - 12029614
1a)
A person that does not currently have a job but is seeking employment can be said to be unemployed.
This phenomenon is known as unemployment. According to Begg and Ward (2009), types of
unemployment can be broadly classified into 4 different categories : Frictional, Cyclical, Structural and
Classical. There is also another kind of employment not acknowledged by them : Hidden
unemployment.

Frictional unemployment occurs when someone voluntarily quits one job in the prospects of
finding another job. This type of unemployment is of little concern to economists since it is
only a temporary, transitional and short lived form of unemployment. As such, it is always
present in the economy and does not count towards the rate of involuntary unemployment.
Cyclical employment, in simplest terms, occurs when there are a lesser number of jobs relative
to the number of job seekers. This can be attributed to a number of factors such as fall in
demand due to the business cycle. Recessions are an example of business cycle fluctuations that
cause a fall in demand.
Structural unemployment occurs when an entire industry or sector of economy falls into
decline. Workers that were previously employed in those industries are unable to find
employment elsewhere due to their skills being made obsolete and unnecessary. An example of
this can be seen in the slow decline of the print media industry due to the rising popularity of
electronic media.
Classical unemployment occurs when the price of labor becomes high enough for it to
negatively affect the demand for labor. Due to the high wage rate, the supply of labor increases
and the demand for it goes down. The labor that is willing to supply itself but is not being
demanded at the present rate, will thus, be unemployed. One example of classical
unemployment that can be foreseen in the future in India's domestic help market. Dr. K.S.R.V.S.
Chalam (Wage rates in rural India, 2010) calculates that the average monthly wage for a
'unskilled laborer' is Rs 2035. The Government of India has proposed a minimum wage for
'unskilled laborers' of Rs 4500. Clearly this would illustrate a case of classical unemployment
where workers have been priced out of the market and supply exceeds demand.
Hidden unemployment (also known as Disguised unemployment) refers to a form of
unemployment that is not reflected in official unemployment data. This is because only workers
that are actively looking for a job are counted as unemployed. Those who have given up
seeking employment are not included in the statistics. People comprising of this category could
be those who have given up trying to get employment after a long period of searching or those
whose employment is seasonal and erratic in nature.

1b)
The loss of construction jobs in 2008 can be attributed to the Sub prime mortgage crisis that resulted
due to the ongoing economic recession. Luhby, T. (Foreclosures soar 76% to record 1.35 million, 2008)
states that much of the housing market's problems were concentrated in the subprime, adjustable-rate
market, where homeowners with weak financial backgrounds got loans they ultimately couldn't
afford.. Velletta and Kuang (Is structural unemployment on the rise?, 2010) state that The remainder
is probably associated with the bursting of the residential real estate bubble and the need for many
unemployed construction workers to find work in other sectors. The effects of both of these factors are
likely to be transitory rather than permanent. The above information indicates that while the loss of
construction jobs in 2008 and subsequent unemployment might be classified as structural
unemployment, it is actually a case of cyclical unemployment. Additional data (Construction, NAICS
23, 2013) shows that construction jobs have risen from a low of 5.5 million in 2011 to 5.78 million in
2013, which further strengthens the case that unemployment in the construction industry is and was
cyclic in nature, caused by fluctuation in demand due to the business cycle. Analyst McBride (Where
are the construction jobs?, 2012) states that Other construction indicators - housing starts, new home
sales, construction spending, builder comments - are all improving (although public construction
spending is decreasing), and construction employment will follow.
The following graph illustrates the total number of workers employed in the construction industry
during and after the 2008 financial crisis :

(Source: http://data.bls.gov/timeseries/CES2000000001?data_tool=XGtable)
The dip and subsequent rise in the number of workers can be seen from 2008 2013, illustrating the
business cycle.

2a)
Monetary policy is known as the rules and regulations laid down by a central bank or monetary
authority. These rules and regulations aim to control the supply of money by influencing various
factors.. This, in turn, has an effect on unemployment, inflation and the GDP of a country depending on
whether the policy is expansionary or contractionary.
Interest rates are one of the many 'tools' used by a central bank to facilitate control over the
supply of money. The intention behind controlling the rate of interest and the desired goal can
be of two types : Expansionary policy aims to counter unemployment by lowering the interest
rate and stimulate the economy by facilitating easier credit and increasing the demand.
Contractionary policy aims to control the rate of inflation by increasing interest rates which in
turn lowers spending and lowers demand.
Reserve requirement is the proportion of total assets of a bank that must be held in reserve with
the central bank. Increasing the reserve requirements decreases the amount of loanable funds a
bank has, thus restricting the supply of money.
Open market operations refers to the purchase and sale of securities by the bank such as foreign
exchange and government bonds. This can be used to control the supply of money. Purchasing
of these securities leads to expansion on the supply of money, while sale, leads to contraction.
This chart illustrates the mechanism and effects of monetary policy on the economy :

(Source :
http://www.oenb.at/en/geldp_volksw/geldpolitik/wirtschaft/how_does_monetary_policy_impact_the_e
conomy_.jsp)

2b)
In order to influence the GDP the RBI has the ability to affect the interest rates in order to stimulate the
economy. If the interest rate is lowered, it will increase the supply of money and stimulate the economy
by promoting easier finance. This will have the effect of creating more demand within the
economy,thus increasing the GDP. But this will also result in increasing inflation as the inflation as the
prices will go up due to more demand. Due to this the RBI will have to decide what levels of GDP
growth are acceptable in relation to the level of inflation.
The other tool that the RBI has at its disposal is the reserve requirement. By lowering the reserve
requirement, there would be an increase in the loanable assets of the bank which would again promote
easier finance and increase the supply of money.
The RBI also has the option of buying securities and foreign exchange in order to increase the supply
of money.
The following graphs illustrate the effects of lowering the interest rates with the ultimate intention of
increasing the GDP :

( Source : http://www.personal.psu.edu/~dxl31/econ4/Spring_2006/printer29.html)

References
Begg,D & Ward,D (2009). Economics for Business. 3rd ed. Berkshire: McGraw-Hill. 242-244.
Dr. K.S.R.V.S. Chalam (2010). Wage rates in rural India. Shimla,: Labor Bureau Printing Unit. p1-7.
Luhby,T. (2008). Foreclosures soar 76% to record 1.35 million. Available:
http://money.cnn.com/2008/12/05/news/economy/mortgage_delinquencies/index.htm. Last accessed
9th March 2013.
McBride, B. (2012). Where are the construction jobs?. Available:
http://www.calculatedriskblog.com/2012/07/where-are-construction-jobs.html. Last accessed 9th
March 2013.
Bureau of Labor Statistics. (2013). Construction: NAICS 23. Available:
http://www.bls.gov/iag/tgs/iag23.htm. Last accessed 9th March 2013.
Valletta, R. , Kuang, K. (2010). Is structural Unemployment on the rise?. FRBSF Economic Letter. 34,
p5.