Question

Q1. How does Structural Unemployment explain current trends in Labor Force Participation rates? What is the role of outsourcing and how does it fit with the U.S. economy becoming a “service’ economy?

Q2. Explain how “discouraged workers” (unemployed workers leaving the labor force) lower the official unemployment rate. ‘Real’ wages being stagnant, what does the low unemployment rate mean?

Q3. Describe the economic impact of the Covid-19 pandemic in terms of globalized supply chains. Mention particular sectors and industries that are affected. How is the drop in oil prices related to the pandemic?

Answer 1

1) Structural unemployment is a longer-lasting form of unemployment caused by fundamental shifts in an economy and exacerbated by extraneous factors such as technology, competition, and government policy. Structural unemployment occurs because workers' lack the requisite job skills or workers live too far from regions where jobs are available and cannot move closer. Jobs are available, but there is a serious mismatch between what companies need and what workers can offer.

Some of the main types of unemployment include structural unemployment and frictional unemployment, as well as cyclical unemployment, involuntary unemployment, and classical unemployment. Structural unemployment focuses on foundational problems in the economy and inefficiencies inherent in labor markets, including a mismatch between the supply and demand of laborers with necessary skill sets. Structural arguments emphasize causes and solutions related to disruptive technologies and globalization.

The unemployment rate is the number of unemployed (jobless workers who are “actively looking for work”) divided by the size of the labor force (the sum of the employed and the unemployed). If the decline in labor force participation in recent years was largely driven by otherwise-willing workers who were discouraged from looking for work because of the weak job market, a robust recovery would draw them into the labor market, boosting the labor force participation rate (as they would now be “actively looking for work”), and thus the unemployment rate.

2) Discouraged workers are those who want and are available to work, but have dropped out of the labor force because they believe there aren't any jobs for them.

Discouraged workers can reduce the labor force participation rate if unemployment is serious enough. At the beginning of a recession, the number of discouraged workers increases as the participation rate decreases. After looking for six months or more, many stop looking and drop out of the labor force. At that point, both the participation rate and the number of discouraged workers drop.

When the economy improves, they will return to the labor force. They may have the hardest time finding a new job, so the number of discouraged workers could increase for a while. Eventually, the participation rate should increase and then stabilize as the number of discouraged workers drops.

3) Stock markets in India posted their worst loses in history on 23 March 2020. However on 25 March, one day after a complete 21 day lock-down was announced by the Prime Minister, SENSEX and NIFTY posted their biggest gains in 11 years, adding a value of ₹4.7 lakh crore (US$66 billion) crore to investor wealth. Up to 53% of businesses in India will be affected due to COVID-19.Various businesses such as hotels and airlines are cutting salaries and laying off employees. The live events industry has seen an estimated loss of ₹3,000 crore (US$420 million). Supply chains have also been put under stress with the lockdown restrictions in place and lack of clarity in streamlining what is an "essential" and what isn't. A large number of farmers around the country who grow perishables are also facing uncertainty.

In the third week of March, Amazon and Walmart-owned Flipkart announced that it would stop sale of non-essential items in India so that it could focus on essential deliveries. Other fast-moving consumer goods companies in the country have significantly reduced operations and are focusing on essentials. Major companies in India such as Larsen and Toubro, Bharat Forge, UltraTech Cement, Grasim Industries, Aditya Birla Group, Tata Motors and Thermax have temporarily suspended or significantly reduced operations. iPhone producing companies in India have also suspended a majority of operations.

Manufacturing

Major companies in India such as Larsen and Toubro, Bharat Forge, UltraTech Cement, Grasim Industries, the fashion and retail wing of Aditya Birla Group, Tata Motors and Thermax have temporarily suspended or significantly reduced operations in a number of manufacturing facilities and factories across the country. Nearly all two-wheeler and four-wheeler companies have put a stop to production till further notice.

E-commerce

In the third week of March, Amazon announced that it would stop sale of non-essential items in India so that it can focus on essential needs.Amazon has followed the same strategy in Italy and France.On 25 March, Walmart-owned Flipkart temporarily suspended some of its services on its e-commerce platform and will only be selling and distributiing essentials. BigBasket and Grofers also run restricted services, facing disruptions in services due to the lockdown.Delhi Police began issuing delivery agents curfew passes to make it easier for them to keep the supply chain open.

Stock markets

On 23 March 2020, stock markets in India post worst losses in history. SENSEX fell 4000 points (13.15%) and NSE NIFTY fell 1150 points (12.98%).However on 25 March, one day after a complete 21 day lock-down was announced by the Prime Minister, SENSEX posted its biggest gains in 11 years, adding a value of ₹4.7 lakh crore (US$66 billion) crore for investors.