(2019) A Level H2 Econs Essay Q2 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)

(2019) A Level H2 Econs Paper 2 Essay Q2

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2. A firm in Singapore is facing an increase in demand for its goods which has led to an increased demand for labour. Its demand for labour is also inelastic. In addition, large numbers of its workers born in 1960s (‘baby boomers’) have been retiring, reducing the number of workers available to the firm.

(a) With the aid of a diagram, explain how this firm’s total expenditure on its workforce will have changed as a result. [10]

Increase in demand for labour 

  1. Demand for labour is a derived demand 

  2. Labour inputs are demanded for their ability to produce goods & services 

  3. An increase in demand for goods & services will correspondingly result in an increase in demand for labour 

  4. This results in a rightward shift in demand from DD0 to DD1 

Decrease in supply for labour 

  1. Retiring number of workers à fall in number of sellers (of labour) à fall in supply for labour 

  2. This results in a leftward shift in supply from SS0 to SS1 

Synthesis 

  1. Demand is price inelastic for the firm as specified in the preamble (production process is likely to have been labour intensive) 

  2. Supply would likely be price inelastic as well 
    (workers will take time to train) 

  3. The firm’s expenditure will likely increase from P0Q0 to P1Q1 assuming that the extent of an increase in demand > extent of decrease in supply 

(b) Discuss whether making changes to the foreign worker levy is likely to be the most effective way the Singapore government can address the labour shortages experienced by such firms [15]

What increasing the foreign worker levy might do (based on demand & supply) 

  1. A foreign worker levy is a tax on the hiring of foreign workers 

  2. Increasing foreign worker levy (as what the Singapore government has been doing) would increase the cost of hiring foreign workers 

  3. This will shift supply of labour to the left, reducing the quantity of workers available from Q0 to Q1, worsening any labour shortages that are already experienced by firms as a result of an ageing population as specified in the preamble. 

How making changes to the foreign worker levy is supposed to address the labour shortages 

  1. The Singapore has been tightening the inflow of foreign migrant workers through tools such as increasing foreign worker levy. 

  2. Certain industries in Singapore, such as Construction are reported to have lower productivity compared to other developed countries. 

  3. The objective of Increasing foreign worker levy is to discourage firms from depending on the use of cheaper, low-skilled foreign labour. 

  4. In doing so, firms will instead be encouraged to invest in technology, to upgrade the skills of their workers. 

  5. This will allow industries to produce more with less, in order to address the labour shortages 

 

Short-run vs long-run 

  1. In the short-run, the labour shortages are not going to be resolved by the use of increasing foreign worker levy, in fact, the labour shortages might be in fact be worsened. 

  2. This is because, firms are unable to, at short notice, replace low-skilled foreign labour with technological / advanced machinery or workers with higher skills. 

  3. Work processes will take time to fine-tune, replace, and be upgraded. 

  4. In the meanwhile, firms will have to contend with the higher foreign worker levy in addition to the existing labour shortages. 

  5. In the long-run, if the government’s plans to get firms to upskill & improve productivity takes root and succeeds, then the labour shortages could be eased. 

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