Economics: Business Cycle and Unemployment

The Business Cycle

• Economic activity fluctuates between periods of expansion (growth) and recession (contraction).
• Malaysia has experienced recessions in the mid-1980s, 1997-98, 2008-2009, and 2020, with a typical pattern of one every 11-12 years.
• Recessions can make employment difficult for recent graduates.

Problems of the Business Cycle

• Rapid economic growth can lead to demand-pull inflation, where excessive spending outpaces available goods.
• Recessions increase unemployment, particularly cyclical unemployment, affecting various sectors.

Unemployment

• Unemployment types include frictional, structural, and cyclical.
• Frictional unemployment is normal job transitions.
• Structural unemployment arises from economic shifts, like the transition from agriculture to manufacturing and services in Malaysia.

Economic Transformation and Unemployment

• Structural transformation causes job shifts between sectors due to technology or economic shifts.
• Examples of shifts include: agriculture declining due to modernization and land use changes; technological advancements replacing traditional jobs with new ones; mobile phone industry transitions impacting companies like Nokia and Ericsson.
• Structural unemployment involves job obsolescence requiring skill adaptation.
• New industries create new job opportunities.
• Cyclical unemployment results from economic downturns, affecting many industries.

Full Employment and the Natural Rate of Unemployment

• Full employment means all resources are utilized, reaching the natural rate of unemployment.
• The natural rate comprises of frictional and structural unemployment.
• Frictional unemployment happens during job transitions.
• Structural unemployment arises from changes in the economy requiring skill adaptation.
• Zero unemployment is not realistically attainable.
• Factors like labor market flexibility and technology influence the natural rate of unemployment, varying between countries.

Economic Costs of Unemployment

• The GDP gap represents the difference between potential GDP (with full employment) and actual GDP.
• A negative GDP gap occurs when unemployment surpasses the natural rate, meaning less output.
• A positive GDP gap happens when unemployment is below the natural rate, meaning the economy exceeds its potential output.
• Okun's Law estimates the GDP loss from unemployment: a 1% increase above the natural rate results a 2% loss in potential GDP.

Social Costs of Unemployment

• Unemployment can reduce skills over time, affecting future employment prospects.
• Unemployment can demoralize individuals, reducing motivation.
• Unemployment can increase family stress, potentially leading to family breakdown and divorce.
• Unemployment can lead to poverty.
• Unemployment can cause societal unrest and tensions between different groups.

Factors Affecting Unemployment Rates

• Younger individuals are more affected by unemployment during economic downturns.
• Lower-skilled jobs are more susceptible to recessions than higher-skilled ones.
• Social inequalities can affect unemployment rates for certain ethnic groups.
• Men tend to be more affected than women during economic downturns.

Conclusion

• Understanding unemployment and its consequences is crucial for policymakers and individuals.
• Solutions involve policies to support a flexible labor market, economic growth, worker training, and vulnerable groups.