Cyclical unemployment

Cyclical unemployment occurs during a recession and in order to tackle this problem, short-run supply-side policies managing wage/income will be adopted so as to lower business costs. 

Figure 1 

ig. 1 depicts a picture of slow growth due to deficiency in demand as seen from how the AD curve cuts near the horizontal range of AD-AS Curve. The use of short-run supply-side policies can shift the SRAS curve from SRAS(0) to SRAS(1). The actual growth of the economy is increased from Y(1) to Y(2). Though it is not very significant as Aggregate Demand is still weak due to consumer pessimism etc, it helps to keep some business from going bust and thus save some jobs. 

An example would be the Central Provident System. The CPF system being a compulsory savings plan requires both the employees as well as the employers to make monthly contributions to each employee's CPF account. At 25% each, the CPF effectively drives a wedge between effective wages and labour costs. Traditionally, higher wages simply imply higher labour costs and lower wages imply labour costs are lower. During recession, the government simply reduces the CPF contribution of the employer. This is particularly effective as the employees' take home salary remains the same while cost of production is trimmed significantly, allowing firms like you to retain most employees with minimal retrenchments.

By changing the size of the wedge, I am able to lower labour costs and hence production costs without affecting disposable income, thereby cushioning the effects of a falling aggregate demand on cyclical unemployment. Also, the Ministry of Finance can cut costs of utilities and rent through rebates to ensure firms are still profiting. 

There are limitations to this policy though. If CPF contribution is cut, lower-income families will be impacted negatively. CPF is supposed to be a safety net for the people in terms of financing housing/medical and savings for retirement. Such cuts could really suffocate lower income households as they are unable to pay their monthly housing loans via CPF and have to top-up using cash.