Micro Economics

Assignment # 03
Submitted to : Dr. Faiza Azhar Khan
Submitted by : Merwah Fiaz
2019-M.ECO-011
Date of Submission: 1st July, 2020
Assignment Question :
Check the impact of corona in labor market internationally and in Pakistan..
COVID-19 Pandemic:
It is also known as corona virus pandemic, it is an ongoing pandemic effecting globally. It is
caused by severe acute respiratory syndrome (SARS). The first outbreak was identified in
Wuhan, China in December 2019. This virus is primarily spread between people during close
contact, via small droplets of coughing, sneezing and talking. The pandemic has effected the
social and economic conditions globally. It has caused the greatest recession since the Great
Depression. It has badly effects our sports, religious, political and cultural events. Schools,
colleges and universities have been closed in almost 172 countries affecting almost 98.5% of the
world’s student population. Louis gave $300+ billion impact on the world’s supply. Lloyd’s of
London estimated that global insurance absorb loss of US$204 billion. It is suggested that
COVID-19 pandemic will be consider as the costliest disaster ever in human history. Hundreds
of millions of jobs could be lost globally. In America more than 40% lost their jobs and filled
unemployment insurance claims. The pandemic induced recession could leave 14-22 million
more people in extreme poverty.

Due to this virus, shortage of raw material used in manufacturing is created. Shortage of supply
has now been seen and Price of the commodities increased. Demand for the essentials of daily
life increases to many folds due to the fear of scarcity. Demand of the equipment needed to fight
the pandemic also rose which lead the prices of such goods twenty times more than the normal
price. This pandemic also effect the food supply globally and it hovers to activate food crisis.
OPEC lowers the price of oil due to decline in demand from China. This virus affected the
political systems of many countries. It leads to isolation and deaths of many political leaders. So,
we can say that COVID-19 results in unemployment, lower wage, increased level of poverty,
lowers imports and exports, low supply of products, high demand, high prices etc. So, it is
affecting the World economically, politically and socially. The most worst impact of COVID-19
is observed in labor market. Now we are going to check the impact of COVID-19 on Labor
Market.

Effect of COVID-19 in WORLD Labor Market:

It is affecting the labor markets badly. Besides affecting the health of workers and their families
it is affecting the labor market on three ways.

1) The quantity of work.. like employment and unemployment level

2) The quality of work.. like wages
3) Affecting the people who are more vulnerable to adverse labor market outcomes.
ILO gives a finding that shows that there is a large increase in unemployment globally.
The global financial crisis increased the unemployment by 22 million.
Effect on Demand of Labor:
Underemployment is also expected to increase. Due to pandemic it is observe that labor demand
is likely to translate significant downward adjustments to wages and working hours. However,
there is no economic downturn in self-employment as it is the person’s choice whether he wants
to earn for survival or maintaining income. Because of this informal employment tends to
increase during crises. The decline in economic activity and limits on people mobility is
impacting both manufacturing and service sector. It is forecasted that decline in international
arrivals of up to 25% in 2020 which would place millions of jobs at risk. Demand side
employment effects also emerge as a vulnerable firms with little cash on hand, trying to adjust
their staffing temporarily or permanently in response to shocks to demand for their goods or
services.

Effect on labor Supply :

Labor supply is declining because of quarantine measures and a fall in economic activity. An
estimate suggests that infected workers lost nearly 30,000 work months, with a resultant loss of
income. Employment impacts imply large income losses for workers. Overall losses in labor
income are expected in the range of between 860 and 3440 billion USD. The loss of labor
income will translate into lower consumption of goods and services which is detrimental to the
continuity of businesses and ensuring that economies are resilient.

Poverty is also likely to increase significantly. The pressure on incomes resulting from the
decline in economic activity will overcome workers close to or below the poverty line. The
growth impacts of the virus used for the unemployment estimates above suggest an additional
8.8 million people in working poverty around the world than originally estimated for example an
overall decline of 5.2 million working poor in 2020 compared to a decline of 14 million
estimated preCOVID-19. Under the mid and high scenarios, there will be between 20.1 million
and 35.0 million more people in working poverty than before the pre-COVID-19 estimate for
2020.

Impact of COVID on Pakistan Labor Market:

By the April 15, the pandemic COVID has infected many people. The medical emergency has
transformed into a labor market crisis due to resulting demand and supply shocks. In order to
flatten the spread of pandemic the government announces the closure of all educational
institutions throughout the country. Provincial lockdown is initiated which badly effects the
economic condition of our country. Lockdown jammed our lives and activities of life. People are
unable to buy the essentials of life also. Daily wage earner are affected by this lockdown the
most. They lost their work and became unemployed.

Now we are going to check the impact of COVID on Pakistan labor Market.

Pakistan has a population of 207 million people of which 63.4 million are engaged in labor force.
The service sector is the largest employer engaging sector which consists of 385 of labor force,
followed by agriculture 37% and the industrial sector 25%. Data shows that 25.7 million workers
are wage employed, only 14.6 million are paid monthly. Remaining 11 million are may be daily
wagers or weekly wagers or piece rated workers.

Due to the lockdown, many of the casual and irregularly paid workers have lost their jobs. In
normal circumstances, unemployed would engage them in self- employment or go to another
work to find the work. But now due to lockdown and curfew It is not possible form them to go to
some other place and find the jobs. While, provincial and Islamabad administration have
instructed employers not to terminate the employment contracts of workers during the lockdown,
74% of the wage employees are working without any contract letters. So the above instruction is
violated.

The Centre for Labor Research has estimated job disruptions for around 21 million workers in
the country on account of the COVID induced lockdowns. The sectors, facing the most
economic risk, are construction, manufacturing, accommodation and food services, wholesale
and retail trade, transport and storage, and real estate and business activities. All at-risk sectors
are labor-intensive and employ 28.45 million workers, most of which are low-paid and low-
skilled. The share of total employment in these high-risk sectors is 47 percent of total
employment in the country.

This pandemic affects both the demand and supply of labor market. The demand as well as of
the labor both decreases. Due to lockdown, business firms, factories, manufacturing industries
all are closed so the demand of the labors decreased while on the other hand, people due to the
fear of corona left the jobs and some fell a prey to it. and there occurs the problem of mobility
And because of this supply of the labor also decreased.

Now we are going to check the change in the labor demand and supply through the help of
diagrams.

Change in the Demand Curve:

 W

S1

wo F E
W1

D1
D2

L1 Lo L

Explanation:
In the above figure, on x-axis labor is represented and on Y-axis wages are shown. S1 is the
supply of the labor which is positively sloped and D1 is the demand curve which is negatively
sloped. E is the equilibrium point where the labor demand and labor supply is in equilibrium and
no one is unemployed. Lo represents the situation of full employment level it means whatever
labor is supplied is easily demanded by the industries. Where w0 is the market equilibrium wage
at which labor are agree to work in the market and the firms are ready to them this wage. Now as
we know due to corona firms, industries, markets everything is shut down so the demand of the
labor decreases. And most of the employed workers are kicked out from the jobs. And we know
that when the demand of the labor decreases wage rate also decreases, as wage is the directly
related with the demand. So due to decrease in demand which is shown by the curve D2 wage
rate also fell from Wo to W1 at which the employment level is L1. It means the employment
level falls creating a level of unemployment from Lo to L1. And new equilibrium is at point F.
Changes in Supply of Labor:

W S2

S1
F
W1

W0 E

D1

L1 L0 L

Explanation:
In the figure above on x-axis employment level is shown and on y-axis wage rate is represented.
S1 is the labor supply curve which is positively sloped and D1 is the labor demand curve which
is negatively sloped . E is the equilibrium point where the labor demand and labor supply is in
equilibrium and no one is unemployed. Lo represents the situation of full employment level it
means whatever labor is supplied is easily demanded by the industries. Where w0 is the market
equilibrium wage at which labor are agree to work in the market and the firms are ready to them
this wage. So there is no unemployment in the country. But now due to corona we can see that
some of the workers are scared of being infected with corona so they left their jobs. And some
are those who got infected and left the jobs. Due to which the supply of the labors decreased
and the curve shifts to the left S2. This decrease in supply is also due to the immobility of
workers because of lockdown. So the labor supply curve shifts due to which the wage rate
increases as wage rate is inversely related with supply of labors. As supply of labors decrease
wage rate increases. And the new equilibrium exist at point F with employment level L1 and
wage rate W1. From Lo to L1 is the unemployment level.

Equilibrium level of Labor demand and Supply:

S2
W
S1

W1
F E
Wo
W2

D1

D2

0 L1 L0* L0 L

Explanation:
In the above diagram on x-axis employment level is shown and on y-axis wage level is shown.
D1 is the demand curve which is positively sloped and S1 is the supply curve which is negatively
sloped. E is the equilibrium point at this Lo is the employment level which is also full
employment level. Wo is the market equilibrium wage. Now due to corona there is a huge effect
on labor demand and supply. Firstly due to lockdown the demand of the Labor decreases ,
markets, firms, industries are shut down. Due to which firms are not hiring labor and the demand
of the labor declines and becomes D2. Because of which wage rate falls because at lower
demand the labor will be willing to work at lower wage also. But then At the same time supply
of the labor also declines because of the fear of corona or being infected by corona some left the
jobs. Immobility of workers also serves a factor of decline in supply so the supply curve also
shifts to S2 and new equilibrium forms at point F where the employment level decreases and is
represented by L1. While the wage rate remains the same at this point. Because due to decrease
demand and supply wage rate will converge to its original level.
 S1

D1