Unemployment in Goa

Goa Taxi Regional Employment Case Study

Due to the halt in mining activity in the Goa-Karnataka region there has been an increase in unemployment. The government is attempting to reduce the unemployment from the mining market by introducing more tourist taxis in the region to go to the Dudhsagar Waterfalls due to its increasing popularity in India.

Analysis:

Unemployment is defined as: People who are out of work but actively seeking work at the current wage rate.

To decrease the unemployment the government has chosen to intervene by increasing the supply of labour in the taxi market to meet the demand by tourists. This will counteract the unemployment that occurred due to the halt of the mining activity in the region; the idea is that those who lost their jobs will be able to become tourist taxi drivers. Taxi driving in the region could support similar salaries to the workers, as their salaries are based upon how many customers they receive as they are paid a cut of their fee.

Unemployment in the Mining Market:

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The quantity of labour demanded has decreased due to the halt of mining activity, since there has been no effect on the quantity of workers there is the presence of a surplus. A surplus in this sense represents the existence of unemployment in the market. There is a considerable gap in the quantity of labour demanded versus the quantity of labour supplied; this gives the miner several options. The miners could offer to work at the equilibrium price even though the demand for labour has dropped thereby increasing the price. The other more likely option is to simply leave the market and seek employment elsewhere, preferably at a similar wage rate and working conditions. This alongside the governments support is what transfers the now underutilised human capital and places this in the tourist taxi market, having the following effect.

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From the graph above it can be noted that there is an outward shift in the supply curve as more taxi drivers have entered the market. This has caused a fall in the price of the labour (fall in wages). This has not caused a surplus in the taxi driver market, as the government recognised that there was a shortage of taxi drivers for this tourist destination and has now been able to meet the demand. It should be noted that this increase in supply won’t be instantaneous as it will take time for those that were employed in the mining market to move to the taxi market due to licensing requirements and the expense of a taxi car.

Evaluation:

The government has successfully solved part of the unemployment issues caused by the halt of mining within the region. There are however several possible consequences to the employment boost in the taxi market. These issues can be identified as competition, environmental effect, future unemployment, and a decrease in government revenue.

Due to the increase of taxi drivers there will be greater competition to get customers, especially during off-season times. The taxi driver’s wages will be dependent on how many passengers they will get and the size of the fee. The taxi market can be identified to contain strong elements of perfect competition, as the consumers have extensive choice of supplier especially after an increase in the number of taxi drivers. The consumer also gets the lowest price possible from the drivers as they are looking for as many customers as possible, and the increase in taxi drivers means greater competition. In a sense there is also freedom to enter and exit the market, because once the taxi driver has a car and a license they can choose when to drive or not. This can be favourable at times when it is off-season and there are not as many tourists to meet the supply of taxis. The consequence of this is the possibilities of making low wages in one particular month, taxi drivers may seek out other work, drive their taxi elsewhere, or simply become underutilised and therefore not benefit economy or themselves. There are however factors that represent the monopolistic nature of the market. It is possible for certain taxi drivers to have nicer cars or offer to double up as tour guides, this may give that particular taxi driver market power in the short-run therefore an advantage.

There may be adverse effects on the environment of the local area due to the increase in the number of taxi drivers. It can be argued that the governments halt to mining activity in the region was to solve the environmental externality of mining. The possible effect of increased taxis may be small in comparison to the pollution caused by mining, however a result of more taxis means that there is a bigger flow of human traffic. The report mentions the need to ensure the continued protection of the rare Olive Ridley Turtles who lay eggs within the popular tourist region, the increased presence of people may affect their population. The report also mentions that the road used to get to the tourist destination is through the forest on a dirt road, this means that there may be increased erosion in the area. What makes the region a tourist destination is not only the waterfalls, but also the natural beauty of the surrounding areas. Therefore, increased traffic in the area may provide a boost to the tourism industry but prove to be a risk for the value of the region.

In the long term there may be more unemployment, as it is unlikely that all of those who had jobs in the mining industry will be able to enter the taxi driver industry. The government would need to find another source to create new employment opportunities. There may also be a decline in government revenue as more tourists will use the taxis rather than the train service (government owned) that runs a route from Goa to the popular tourist destination.

The government has effectively solved the unemployment problem that arose from the halt in mining in the region, but in a short-term manner. There may be consequent issues to the solution the government has opted for. This solution very much depends on how successful the region maintains itself to be a tourist destination in the future.

GDP: An Indicator of Economic Welfare?

Examine The Difficulties of Using GDP as a Measure of the Welfare of an Economy:

It can be argued that gross domestic product does not actually do a good job of what we most often use it to display: growth. There are some key aspects that are ignored through the use of GDP as a marker for the growth and welfare of an economy. It is important to clarify that growth is not necessarily good if there is the exploitation of land, labour, and capital. This is because the main aim of the economy is the provision of our welfare, so people are employed, stable prices, and sustainable growth.

Gross Domestic Product can be defined as:

The market value of all the goods and products produced or provided within a country at a given moment in time.

There are various ways to determine the GDP of a country, there is the expenditure approach or the production approach. The expenditure approach is:

GDP = private consumption + gross investment + government spending + (exports-imports)

This identifies the first issue in which GDP fails to accurately measure the welfare of an economy. The calculation of GDP at no point involves whether or not the welfare of the people has improved, GDP is used as an indicator of a standard of living because the central variables tend to attribute towards factors that improves people’s welfare within an economy. GDP should be considered as an indicator of economic activity.

The measurement of gross domestic product is considered to have externalities; in this case it is the recognition of the factors that attribute to welfare and standard of living that the measurement ignores.

  • The first issue is wealth distribution; GDP does not describe whether or not the people are truly benefitting from economic growth. This can be seen in countries such as Qatar where an insignificant percentage of the population hold all the wealth of the country, but the wealth is significant due to oil trade. Due to the manners in which GDP can be calculated it does not show whether or not growth is actually improving the welfare of the people.
  • Gross domestic product does not include non-market transactions. Examples of non-market transaction can be noted as volunteer work, where work is done by the good will of people. There is also the example of open software programmes such as Linux which has developed our approach to coding and programming even though Linux is run as a volunteer programme. Factors such as volunteer work greatly benefit society and improve the general standard of living and gross domestic fails to recognise this because it is based on wholly economic activity.
  • Non-monetary & black markets fail to be identified as a part of the economic activity in a country that would attribute to GDP. Many undeveloped economies rely on non-monetary economies, this means that trade is done through swapping goods, rather than the employment of debt instruments and banknotes. This means that the economic activity and possible welfare of people in undeveloped countries may be underestimated if based around gross domestic product. There is also the existence of black markets, which consists of trade of illegal goods or the ability to evade tax, and as a result there is the underestimation of GDP.
  • Another difficulty with attributing GDP to economic welfare is the issue of what is being produced. For example if many people were getting sick and required healthcare there would be a boost in GDP as this would account for economic activity, however this obviously does not concern welfare as it would be better if the people did not become ill in the first place. This can be summarised as uneconomic growth where economic growth brings about a decrease in the quality of life. This can be applied to the issue of using fossil fuels for energy; even though increased energy consumption usually corresponds with growth it may mean more pollution and adverse and harmful effects to our environment.
  • Finally, there is the issue of sustainable economic growth. There are many historic examples where there was a boost in GDP due to the discovery of new resources or the re-utilization of land or capital. However this growth would not be sustainable due to the scarcity of those resources. This would incur the miscalculation of GDP, and again fail to represent the welfare of the economy.

The use of gross domestic product can be useful to give a holistic view of a countries economy, however when looking at the welfare of an economy it fails to be an effective indicator because it does not involve factors such as happiness, and non-monetary activity within that country which directly attribute to peoples standard of living. This is why there are other approaches to the welfare of an economy such as the Human Development Index (HDI) or Gross National Happiness (GNH). The main issue with attempting to indicate a level of welfare within a country is that factors such as environmental sustainability can be difficult at times to quantify, and equally so with happiness. However, the dependence of GDP to indicate welfare of an economy and growth is becoming an outdated concept.

Barriers to Entry, Profit, & Price

Examine The Impact of an Increase in Barriers to Entry on Prices & Profits:

Barriers to Entry: The inability for a firm to enter the market due to infrastructural, legal, cost, financial, and brand barriers. If there is a high cost to enter the market it discourages smaller firms from entering, therefore limiting competition. This is why high barriers to entry are a signal of the existence of monopoly or oligopoly power.

Normal Profit & Abnormal Profit: Normal profit covers the average total cost of the firm, whereas the existence of abnormal profits means the firm can reinvest the profits into R&D, increase the wages of workers, and pay-out dividends to shareholders. Abnormal profit identifies the existence of monopoly or oligopoly market structure.

If there is an increase in the barriers to entry for a given market it may mean that the market becomes:

  • Less competitive
  • Greater representation of monopoly or oligopoly structure
  • Possible increase in profits for firms
  • Possible increase of prices, since less competition or substitute goods means that the firm could become a price setter rather than taker.

A comprehensive example of increasing barriers to entry having an effect on prices and profit can be identified in the car industry for hatchbacks within Europe. Volkswagen is notable for their immense economies of scale, therefore posing a high barrier to entry for their share of the market. Volkswagen is able to offer affordable hatchbacks and still maintain a high quality product without incurring a loss and maintaining the majority of the market share. However, their main rival PSA Peugeot Citroën is able to create cars of a similar standard but at a marginally higher price.  These are the two biggest firms in the hatchback market, since they already have a foothold in the market, and successful brand recognition it makes it difficult for firms like Kia to enter the market.

Due to the existence of market power through the high barriers to entry Volkswagen and PSA have an oligopoly like relationship within the hatchback market. Therefore, both firms have abnormal profits and tend to have similar prices while pushing out possible foreign competition. Shown below is a graph exhibiting a kinked demand curve and the market of hatchbacks.

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The above shows limited competition on price. The higher marginal cost of PSA can be justified by the lack of economies of scale similar to Volkswagen, meaning they will not be as efficient or productive with given resources. Shown on the graph is the hypothetical point at which Kia were to operate, they would suffer from high marginal costs at a restricted quantity of units due to export/import fees and the cost involved in the transport of the cars. There is also the issue that Kia does not have the same brand recognition as PSA or Volkswagen.

If the barriers to entry were to increase there would be a greater difficulty for the firms such as Kia to enter the European market. This is what establishes the oligopolistic relationship between Volkswagen and PSA. Barriers to entry are what ultimately cause the formation of monopolies or oligopolies. This then has a consequent impact on the prices of products in a certain market (a possible increase) and a greater opportunity to reach a point of abnormal profit through profit maximisation.

Evaluation:

There are various methods of getting around the high barriers to entry, but it would require a firm to either innovate or be able to obtain investors to help launch it into the market. Kia could offer cars with newer technology, better engines, and greater fuel efficiency in an attempt to win market share within Europe. Kia would probably have to compete on price and offer more in a car than the firm’s rivals. Kia will benefit from cheap East Asian production, but there are still issues surrounding the transport of the vehicles. To circumnavigate the high barriers to entry the firm must be willing to take on debt to attempt to pay high fixed costs, or attract investors which would usually require innovation to persuade investors away from the dominant firms.

The diversification of the market for hatchbacks would benefit the consumer, as the firms are more likely to compete on price as well as offer cars with better base packages (i.e. included option in the car such as xenon headlights). However this may create an unsustainable loss for firms like PSA who suffer from a high fixed cost of wages due to its central production being based in France. PSA has already begun to lose its position as the main competitor of Volkswagen as Ford has vigorously entered the market.

Overtime the high barriers to entry may fall as there is greater symmetry of information in the market, as well as the reduction of the impact of economies of scale through the development of new technologies and tools that can produce cars more efficiently. There will always remain however the high fixed cost of the factory, but over time the issue that will affect firm’s profits and the prices of cars will be the variable costs such as where materials are sourced.

This is why the example of the car industry is good for displaying the effect of barriers to entry, and their entailing effect on the price of the good; as well as the potential for normal or abnormal profit within the market.

Growth & Structural Reform

Production Possibility Frontier & Aggregate Supply:

There are many determinants for a shift in aggregate supply; this would mean an increase in real output without an increase in the price level.

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Some examples of the determinants are:

  • Education: Increased productivity, capabilities, and efficiency of the labour force
  • Innovation/R&D: The product may become more useful or easier to manufacture
  • Government Regulation or Subsidy: Encourages production, or deregulates an immobile market.
  • Transport/Infrastructure: If there was better transport then people could work more often rather than waste time in traffic,  development of infrastructure develops efficiency.

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Analysis from Article:

Using Evidence from the Article Explain the Impact of Investment on the UK’s PPF?

Increasing the quality of university education and teachers may mean that the workforce becomes more efficient and productive. The article highlights the need to invest in human capital. This would lead to an outward shit for the PPF because there is a greater potential for production. If this potential were to be realised there would be a shift to the right for the aggregate supply curve.

The article mentions that the government should target investment towards equipment rather than property, increasing government investment into R&D and general innovation. The lack of innovation is identified through the lack of patents submitted. The issue surrounding R&D and capital investments are the long pay-off periods, whereas financial products pay-off in the short term. If more money were to be invested in long term research and development projects there is an outward shift for the PPF as there is a higher possibility of products being manufactured with greater efficiency.

Finally, the article recognises that British infrastructure is considered “mediocre” being ranked 24th in the world. It relates this to government failure, and the amount of time it takes to get energy bills through and the time it takes for projects to come to fruition. If there were to a boost in infrastructure spending, then there is the potential for an increase in productivity leading to an outward shift in the PPF.

Evaluate the Argument That Structural Investments Alone Are Not Enough to Stimulate Growth?

There are many theories and manners of approaching how best to stimulate growth, the article heavily leans toward the Salter Cycle. This can be summarised as an increase in productivity and efficiency, resulting in reduced inputs of land, labour, and capital while achieving a great output. This what the article highlights as structural investment, i.e. improving education, improving transport, and stimulating research and development. This does work to stimulate growth however it must be realised that humans can only ever be so efficient or productive, and that factors such as capital and land become scarcer in developed countries.

It is true that the government needs to stimulate development within Britain; it is unacceptable to continue supporting financial institutions that don’t contribute to growth. Energy and energy efficiency are two factors which are integral to stimulating growth within an economy, simply because when there is a greater quantity of energy and at a cheaper price more is used. This is where the American government unlike the British government took a lead and has effectively introduced shale fracking to slash gas prices down and increase consumption. The British government has been slow to develop supporting infrastructure and R&D for the implementation of fracking, when a recent geology report displayed the abundance of shale formation across Britain. This highlights the need for structural investments, but into sectors that have optimistic prospects for the future.

The other methods of approaching growth stimulus can be equally as effective. There is the classical approach of increasing free trade between countries, and the development of trade agreements to stimulate production resulting in general economic growth. In the article there is a display of a real GDP per person graph, it shows that Britain had the highest real GDP in 1870. This was a time when Britain had abundant trade from its colonies (without restriction due to naval dominance and to an extent exploitation), and the expansion of trade into the “new world”.

Structural investment will assist Britain in re-modernising; however it can be argued that it is best suited to developing economies that still have a greater abundance of land, labour, and emerging capital. One possible route is the development of military infrastructure; this would mean creating more aircraft carriers and submarines. This has worked to an extent to help stimulate American growth as it announced that two new aircraft carriers are going to be developed, and the roll out of the successor to the F-22 Raptor.

Another possible approach to growth stimulation is to induce a state of semi-isolationism which had worked for East-Asian economies in the 90s. The crash for the East-Asian economies can be attributed to the liberalization of markets which had stifled growth due to speculation. Creating a state of semi-isolation reduces the inefficiency of market speculation, and makes a country more self-dependent, and this may be realised through structural investment. Overall, it can be recognised that structural investment are a necessity, but it must be coupled with a new economic approach to achieve not only growth but sustainable growth.