Economics X Creativity
Multimedia Case 9: Journey to Economics
Case Study prepared by:
Prof. Michael FUNG
Dr. Fred KU
Dr. David CHOW
Mr. Sam KONG
Miss WingUe CHOI
Miss Cindy LAU
Mr. Patrick CHEUNG
Video produced by: CUHK Business School (2012)
* Should you have any comment, please email Prof. Fung (creative.econ@cuhk.edu.hk)
P. 1
Introduction
This video features Fung Zeng (馮僧) and his three disciples in their
journey to the west for the precious sutras (西經). Fung
Zeng was a monk and an economist, and was requested by
Buddha to look for the sutras. During his journey, he met
Monkey Ng Hung (悟空), who was frictionally unemployed,
Bai Gai (八戒), a gloomy lady who underwent cyclical
unemployment, and Sha Zeng (沙僧), a bus driver who was
going to be structurally unemployed when take-copters (竹
蜻蜒) becomes popular. With his economic insights, Fung
Zeng impressed and reformed the 3 victims of unemployment and they decided to join him for
the journey. With their hard work, Fung Zeng and his three disciples finally found the sutras at
Cheng Yu Tung Building, CUHK. The Buddha gave them an “A” grade to reward for their effort.
The video demonstrates and explains the different
types of unemployment, as well as ways to alleviate
the problem.
Key Question
How to identify different types of unemployment and
evaluate their impacts?
*Key Concepts
1. Definition of unemployment
2. Frictional unemployment
3. Structural unemployment
4. Cyclical unemployment
Learning Outcomes
Understand the causes and effects of different types of unemployment, as well as the ways to
alleviate the problem.
Terminology
The terms used throughout this worksheet are in accordance with the Census and Statistics
Department, HKSAR. In the appendix, there are some definitions you may find useful.
*The types of unemployment are not required in the Curriculum. The questions related to those
concepts are for students’ knowledge enrichment.
P. 2
True / False Questions
1.
Briefly speaking, unemployment refers to someone who is actively seeking job and
able to work but cannot find a job.
2.
An increase in women labour participation is likely to decrease the size of labour
force.
3.
Cyclical unemployment arises from the structural change of the economy.
4.
Frictional unemployment exists as time is needed for workers to search for the jobs
that best suit their skills.
5.
The unemployment rate equals the percentage of people who cannot get a job divided
by the population of age above 15.
6.
Unlike cyclical unemployment, both frictional and structural employment are not
caused by short run economic fluctuations.
7.
Structural unemployment generally lasts longer than frictional unemployment.
8.
Macroeconomic policies such as cutting interest rate and increasing money supply can
easily reduce the size of structural unemployment.
9.
Cyclical unemployment always exists in an economy.
10.
Other things equal, countries that offer more generous and longer-lasting
unemployment benefits are likely to have a higher unemployment rate.
MC Questions
1. According to the video, _______ can be reduced by _______ income tax rate or
increasing _______.
A) seasonal unemployment; increasing; money supply
B) cyclical unemployment; cutting; interest rate
C) cyclical unemployment; increasing; money supply
D) cyclical unemployment; cutting; government expenditure
2. Cyclical unemployment ____ during expansions and ____ during recessions.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
P. 3
3. Holding other factors equal, a substantial cut in real interest rate will most likely reduce
A) inflation.
B) unemployment.
C) imports of the economy.
D) investment.
4. In Hong Kong, structural unemployment can be reduced by
A) importing high-tech experts from the mainland.
B) increasing the minimum wage.
C) providing more vocational retraining programmes.
D) restructuring the capital market to attract more foreign capital.
5. Structural unemployment can be a result of
A) foreign competition.
B) a slowdown in the rate of economic expansion.
C) normal labour turnover.
D) university graduates entering into the job market.
6. In the late 1980s, manufacturers in Hong Kong relocated their factories to the mainland.
Many factory workers could not find a job as their skills were not directly applicable to
other industries. These workers were facing
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
7. Unemployment rate is
A) the ratio of the number of the unemployed to the number of the employed in a
given period of time.
B) the percentage of the population not currently employed.
C) the rate of change of the unemployment figures from one period of time to another.
D) the ratio of the currently unemployed to the labour force.
8. The labour force divided by the non-institutional population aged 15 and over equals the:
A) unemployment rate.
B) employment rate.
C) labour force participation rate.
D) population growth rate.
9. When a mother re-enters the labour force and searches for a job, immediately,
A) frictional and cyclical unemployment increase.
B) cyclical unemployment increases.
C) structural unemployment decreases.
D) frictional unemployment increases.
P. 4
10. Frictional unemployment may increase if
A) the government increases unemployment benefits.
B) the occupational mobility of labour increases.
C) there is more information about job vacancies.
D) there are structural changes in the economy.
Discussion Questions
1. In the video, the Buddha asks Fung Zeng (馮僧) the definition of unemployment.
Generally speaking, unemployment refers to a situation in which a person is willing and
able to work but somehow cannot find a job. Note that the precise definition of
unemployment may differ across countries. You may refer to the appendix for the
definition by the Hong Kong Government.
(a) Fung Zeng (馮僧) retires after getting the sutras (西經). Would he be
considered as unemployed? Explain your answer.
(b) Ng Hung (悟空) is admitted into a secondary school as a full time student after
getting the sutras (西經). Would Ng Hung (悟空) be considered as unemployed?
Explain.
(c) Bai Gai (八戒) opens a café after getting the sutras (西經). Would Bai Gai (八
戒) be considered as unemployed? Explain your answer.
2. Unemployment rate refers to the proportion of unemployed persons in the labour force
while underemployment rate refers to the proportion of underemployed persons in the
labour force.
(a) What is the difference between unemployment and underemployment?
(b) Compute the number of unemployed and number of employed persons in
Hong Kong in 2011 using the data below:
Unemployment rate
3.4%
Labour force
3,749,100
Source: Census and Statistics Department, HKSAR1
(c) Other things being equal, if there are 1,000 people retiring from their full time
job, how would the unemployment rate change? Explain.
(d) Other things being equal, suppose there are 1,000 unemployed people
enrolling into a two-month full time training programme of the Employees
Retraining Board. How would the unemployment rate change? Explain.
3. The video introduces three types of unemployment, namely frictional, structural and
cyclical, and their causes.
(a) The advancement of information technology makes it easier to search for
job-related information on the Internet. What kind of unemployment can it
help reduce? Explain.
(b) Nowadays in Hong Kong, over 90% of GDP comes from the tertiary
industries. New immigrants, however, may not possess skills needed in some
tertiary industries. As a result, many of them are unemployed.
i. What kind of unemployment is it?
P. 5
ii. Suggest a possible way to alleviate this kind of unemployment.
(c) The financial crisis in 2008 led to a slump in the global financial market.
Hong Kong was no exception. The unemployment rate in Hong Kong surged
to above 5% in 2009.
i. What type of unemployment was caused by such a recession?
ii. Suggest a policy that can possibly help to reduce this kind of
unemployment.
iii. In the long run, would you expect the type of unemployment in (c)(i) to
persist?
4.
We can better understand the employment situation by computing unemployment rate
of various demographic groups. Below is the unemployment rate in Hong Kong across
age groups in the period from February to April 2012.
Source: Census and Statistics Department, HKSAR2
(a)
From the graph above, which age group had the highest unemployment rate?
Why is it so?
(b) From the standpoint of the unemployed, what are the impacts of
unemployment on their lives?
(c) Considering society as a whole, why is unemployment a macroeconomic
problem? What are its costs to the economy?
(d) Would unemployment affect the welfare of the employed as well? Explain.
P. 6
Challenging Question
5.
In Hong Kong, the Statutory Minimum Wage has come into effect since May 1, 2011.
It was set at the level of $28 per hour. The ordinance widely affects industries such as
logistic services, property management, security services, cleaning services, catering
and retail industries.
(a) Which type of workers, high-skilled or low-skilled, would be affected more
seriously by the statutory minimum wage? Explain.
(b) Other things equal, would unemployment rate increase or decrease due to
the imposition of the ordinance?
(c) Suppose you are the owner of a restaurant. You are employing two dishwashing workers, and each of them can wash 100 dishes in an hour. Before
the imposition of the minimum wage ordinance, their hourly wage was $20.
Suppose the average hourly cost of an automatic washing machine is $50. It
can wash 200 dishes per hour.
i.
How will the minimum wage legislation affect your hiring decision? Show
your calculation.
ii.
Apart from wages of workers and purchase cost of the machine, are there
other economic factors that may possibly affect your decision?
(d) Suppose you have two job offers. The details of the offers before the
minimum wage law are listed below:
Auditor
Hourly wage $28, heavy workload, strictly monitored
by manager
Security Guard
Hourly wage $20, no supervision by managers
With the minimum wage, the hourly rate of security guard rises to $28.
Assume the working hours are the same for both jobs, and workload and
financial returns are the only concern. Which job would you choose?
(e) Suppose there are two job candidates competing for the post of security
guard. They are of similar attributes, but one is much older than the other.
Which candidate will be more likely to be employed? Explain.
(f) The minimum wage law aims to protect the welfare of low-skilled and other
disadvantaged workers. Based on (c), (d), (e) and the news below, do you
think the law can protect the interest of them? Explain your answer.
According to the news article from Ming Pao on May 1, 2011,
(http://news.hk.msn.com/local/article.aspx?cp-documentid=5146194), the
low-skilled workers’ salary has moved closer to that of fresh university
graduates.
P. 7
(g) The minimum wage ordinance has come into effect for almost a year.
However, the unemployment rate did not increase as many people expected
and it even dropped. Is the economic theory refuted by the data in this case?
6. Suppose the government required all companies to provide employees five working days
paternity leave on full pay on childbirth, and this will raise the cost of employee by $10
per hour.
(a) What effect does this government mandate have on the demand for labour?
(b) If employees value this benefit exactly equal to its cost, what effect does this
government mandate have on the supply of labour?
(c) If the wage is free to balance supply and demand, how does this law affect the
wage and the level of employment? Are employers better or worse off? Are
employees better or worse off?
(d) If a minimum-wage law prevents the wage from balancing supply and demand,
how does the employer mandate affect the wage and the level of
unemployment? Are employers better or worse off? Are employees better or
worse off?
(e) Now suppose that workers do not value the mandated benefit at all. How does
this alternative assumption change your answers to part (b), (c) and (d) above?
P. 8
Appendix
 Labour force: the land-based non-institutional population aged 15 and over who satisfy the
criteria for inclusion in the employed population or the unemployed population.
 Labour force participation rate: the proportion of labour force in the land-based noninstitutional population aged 15 and over.
 Unemployed persons refer to those persons aged 15 and over who fulfil the following
conditions:
(a) Have not had a job and have not performed any work for pay or profit during the 7
days before enumeration;
(b) Have been available for work during the 7 days before enumeration; and
(c) Have sought work during the 30 days before enumeration.
However, if a person aged 15 or over fulfils the conditions (a) and (b) above but has not
sought work during the 30 days before enumeration because he/she believes that work is
not available, he/she is still classified as unemployed, being regarded as a so-called
"discouraged worker".
Notwithstanding the above, the following types of persons are also classified as
unemployed:
(a) persons without a job, have sought work but have not been available for work
because of temporary sickness; and
(b) persons without a job, have been available for work but have not sought work
because they:
i.
have made arrangements to take up a new job or to start business on a
subsequent date; or
ii. were expecting to return to their original jobs.

Underemployed persons: employed persons who have involuntarily worked less than 35
hours during the 7 days before enumeration and either
(a) sought additional work during the 30 days before enumeration; or
(b) have been available for additional work during the 7 days before enumeration.
Following this definition, employed persons taking no-pay leave due to slack work during
the 7 days before enumeration are also classified as underemployed if they worked less
than 35 hours or were on leave even for the whole period during the 7-day period.
Source: Census and Statistics Department, HKSAR (http://www.censtatd.gov.hk/hkstat/sub/sc30.jsp)
Reference
1. Source:http://www.statistics.gov.hk/publication/general_stat_digest/B10100062012AN12
E0100.pdf#up_and_ur
2. Source:http://www.censtatd.gov.hk/hong_kong_statistics/statistics_by_subject/labour/GH
S_tables.pdf
3. Source:http://www.censtatd.gov.hk/hkstat/sub/sp250.jsp?subjectID=25&tableID=030&ID
=0&productType=8
P. 9
Suggested Answers
True / False Questions:
1.T
2.F
3.F
4.T
5.F
6.T
7.T
8.F
9.F
10.T
MC Questions:
1.D
2.C
3.B
5.A
6.B
7.D
8.C
9.D
10.A
4.C
Discussion Questions:
1.
(a) No. Fung Zeng has retired. He has no intention to find a job and not in the labour
force. He would not be considered as unemployed.
(b) No. Ng Hung is a full time student. He is not looking for a job and not in the
labour force. He would not be considered as unemployed as well.
(c) No. Bai Gai is at work for profit (self-employed). He would be considered as
employed.
2.
(a) Unemployment refers to persons who involuntarily have no jobs while
underemployment refers to persons who have involuntarily worked less than 35
hours during the 7 days before enumeration. You may refer to the appendix for the
exact definitions by the Hong Kong government.
(b) Unemployment rate = unemployed / labour force
Number of the unemployed = 0.034 * 3749100 = 127,469
Number of employed = labour force - number of unemployed = 3,621,631
(c) Note that unemployment rate = unemployed / labour force. Now that the labour
force decreases by 1,000 and the number of unemployed remains unchanged, the
unemployment rate will increase.
(d) In principle, when they enrol into the full-time training programme, they will not
be classified as unemployed. Thus, both the number of unemployment and labour
force decrease by the same amount, resulting in a lower unemployment rate.
P. 10
3.
(a) Frictional unemployment. The technology advancement enables a smoother flow
of information such as the details of jobs including working hours, required skills
and experience. Thus, job matching can be done in a shorter period of time and at
a lower cost.
(b)
i. Structural unemployment
ii. A possible way to reduce structural unemployment is to provide training
programme, which helps the unemployed to acquire new and applicable
skills.
(c)
i. Cyclical unemployment
ii. It may be reduced by expansionary fiscal policies like reducing tax rate or
raising government expenditure.
iii. Both macroeconomic policies and the self-correcting mechanism of the
market itself may help restore the economy to the long run equilibrium,
and theoretically cyclical unemployment will disappear.
4.
(a) The group of 15-19 had the highest unemployment rate. People in this age group
usually have low academic qualification and little working experience. They are
less competitive in the labour market and thus, more difficult to find jobs.
(b) Time needed to spend on job hunting, psychological impacts like social pressure,
financial consideration, falling behind from the latest information of the industry
development etc.
(c) Inefficiency will result from the wastage of labour resource. Long term
unemployment will also lead to withering of their existing skills and create social
instability.
(d) Yes. The government needs to provide financial support through Comprehensive
Social Security Assistance (CSSA) Scheme for some of the unemployed, thus
increases the financial burden of the government and the taxpayers (employed) in
turn. Further, if social stability is in question, foreign investment might be
discouraged, and the whole economy would be affected.
5.
(a) Low-skilled workers. The low-skilled workers whose hourly wage was below the
minimum wage might be seriously affected. With the minimum wage in effect,
they might be able to earn more or some of the employers may be unwilling to
pay them a higher wage for the same duties. Layoff may be resulted. For highskilled workers, their wages are usually higher than the minimum wage. Hence
they may not be directly affected.
(b) As long as the minimum wage is above the market clearing wage for at least some
types of workers, unemployment rate will increase.
(c)
i. Before the minimum wage introduction:
The hourly cost of hiring two plate washers to wash 200 plates = $40
P. 11
The hourly cost of using a washing machine for 200 dishes = $50. It is less
costly to hire workers for the job, I would hire workers instead of using
the machine.
After the minimum wage introduction:
The hourly cost of hiring two plate washers to wash 200 plates = $56
The hourly cost of using a washing machine for 200 dishes = $50. Now it
is less costly using the machine, I would replace the workers by the
machine.
ii.
(d)
(e)
(f)
(g)
The lifetime of the washing machine, maintenance cost of machine,
management cost of workers, etc.
Under the current circumstance being a security guard is a better deal. The
workload is much less than an auditor, with the same level of financial
compensation.
The younger one. As a security guard, the younger one potentially possesses
higher productivity. With the statutory minimum wage, an employer may be
forced to offer a relatively higher wage even to those with lower productivity.
Given the same level of expenditure on compensation, the younger candidate for
security guard is more likely to be preferred.
The minimum wage law raises the cost of employing workers. Employers have
more incentive to look for candidates with higher productivity (in terms of
academic qualifications, age, etc.), which worsens the employment prospects of
low-skilled workers.
In general, we assume “other things being equal” when performing our analysis.
However, in reality, many different factors can change at the same time, and thus
we must be very careful when drawing conclusion.
Year Quarter
2009
2010r
2011r
2009 Q1
Q2
Q3
Q4
2010 Q1r
Q2r
Q3r
Q4r
2011 Q1r
Q2r
Q3r
Q4r
2012 Q1r
Q2p
HK$ million
1,622,516
1,737,619
1,824,997
378,819
388,015
416,564
439,118
409,429
414,372
445,361
468,457
440,489
436,930
464,933
482,645
443,712
441,590
GDP
In chained (2009) dollars
Year-on-year %
Quarter-to-quarter % change in the
change
seasonally adjusted GDP
-2.6
N.A.
7.1
N.A.
5.0
N.A.
-7.9
-3.5
-3.4
3.5
-2.0
0.6
2.5
2.1
8.1
1.9
6.8
1.9
6.9
0.9
6.7
1.7
7.6
2.9
5.4
-0.4
4.4
0.1
3.0
0.4
0.7
0.6
1.1
-0.1
P. 12
Source: Census and Statistics Department, HKSAR3
In this case, we have to note that the macro economy was changing when the
minimum wage was imposed. When the minimum wage ordinance was enacted,
HK’s GDP was rising, which might be caused by the increased tourists’
expenditure, and it might in turn lead to an increase in equilibrium wage rate.
Employers, in order to keep their output levels, might not want to lay off
employees, even though they must pay a higher wage. In other words, the effect
of minimum wage might be offset by the better macro environment and thus
cannot be seen from the data.
6.
(a) If a firm did not provide such benefits prior to the legislation, the labour demand
curve would shift down by exactly $10 at each quantity of labour, as the firm
would not be willing to pay the same wage as before given the increased labour
cost due to the benefits.
(b) If employees value the benefit by exactly $10 per hour, they will be willing to
work the same amount for a wage which is $10 less per hour, so the supply curve
of labour shifts down by exactly $10.
(c) As the demand and supply curves of labour both shift down by the same amount,
the equilibrium quantity of labour is unchanged and the equilibrium wage is
decreased by $10. Therefore, both employees and employers are just as well off as
before.
(d) If the minimum wage law prevents the wage from falling, the wage will be
unchanged and the level of unemployment will increase. Initially, labour quantity
supplied is L1S and labour quantity demanded is L1D, so unemployment is given
by L1S - L1D. The downward shift of both the demand and supply curves gives a
new equilibrium with labour quantities supplied L2S, labour quantity demanded
L2D, and unemployment L2S - L2D. The wage is unchanged, the level of
employment declines, and the level of unemployment rises. Employers are worse
off since they hire less labour at a higher wage (including benefits), i.e. they lose
some of their productivity. The workers who become unemployed are worse off
because of the policy, while workers who remain employed are better off, since
their wages plus benefits have increased.
P. 13
Wage
S1
S2
Wagemin
D1
D2
L2D
L1D
L1S
L2S
Quantity
(e) For part (b), if the workers don't value the mandated benefit at all, the labour
supply curve doesn't shift down. As a consequence, in part c, the wage rate will
decline by less than $10 and the equilibrium quantity of labour will decrease. The
new wage, w2, will be less than w1, but greater than w1 - $10. Employers are
worse off, since they now pay a greater total wage plus benefits for fewer workers.
Employees are worse off, since they get a lower wage and work less.
With a minimum wage in effect, as in part d, the impact on unemployment isn't as
bad as when the workers valued the benefits. Looking back at the graph in part
(d), the only difference is that the labour-supply curve doesn't shift, so the
equilibrium quantity of labour supplied stays the same at L1S. So, the wage stays
the same, labour demand declines, labour supply is unchanged, and
unemployment rises. As before, employers are worse off since they get less
labour at a higher wage plus benefits. Employees are worse off, too, since there's
less employment at the same wage.
P. 14
Wage
S1
W1
W2
W1- $10
D1
D2
L2
L1
Quantity
P. 15