Alberta, a major and famous western province of Canada, has enjoyed a healthy economy resulting from crude oil exports. The region serves as the largest producer of synthetic crude, crude oil and natural gasses in Canada. Alberta arguably ranks in the second position in the leading natural gas exporters. The city has therefore offered many employment chances not only to the locals but also to people from other nations. However; the sudden collapse in the prices of crude oil has served to drive up unemployment rates in one of the most oil-sensitive regions in Canada (The Globe & Mail, 2015). The level of unemployment spiked to a stunning 12.6% right from 1.2% in the cities of Labrador and Newfoundland between January and February 2015. With the help of IS-LM model, the essay seeks to analyze the unemployment state in Alberta and provide succinct solutions to the dilemma.
According to the Globe & Mail, approximately 14,000 people lost their jobs between January and February 2015. In what would be said to be the least affected regions in western Canada, unemployment has increased by to 5 % in Saskatchewan. Alberta has however borne the brunt of the decline. The cutbacks in the oil patch have resulted in a massive slump in oil prices, reversing the fortunes of Alberta. It is veritable that the oil shock has served to deteriorate the market condition in Alberta. As a result of the decline, more than 18,000 jobs were lost in three cities (Alberta, N&L, and Saskatchewan) within a month. With the fall in the West Texas International oil prices, it is expected that the unemployment rate could rise even with a greater margin (The Globe & Mail, 2015). The situation has reduced the vast revenues the Western Provinces of Canada enjoy from the export of crude oil.
The situation in Western Canada can be analyzed using the IS-LM (Investment Savings- Liquidity Preference Money Supply) model. The model graphically represents the money market (LM curve) and the goods market (Investments-Savings curve) on the same axis. The vertical axis represents the interest rates (r) while the X-axis represents the national income (Y). The point of intersection between the IS curve and LM curve give the equilibrium in the economy. The IS curve that is a downward sloping curve represents the equilibrium in the goods market. On the other hand, the LM curve that slopes upward represents equilibrium in the money market. Through unemployment and inflation, the government can influence the economy. The government can employ fiscal policies to affect the rightward shift of the IS curve and monetary policies to control the shifting of the LM curve. Inflation and unemployment are therefore necessary evils in the economy. With high inflation, the level of unemployment is low as represented by the initial IS-LM model. Through fiscal policies, the government may influence the degree of unemployment through increased spending. However, the move would carry its cost in the economy since the interest rates would go up.
Assuming that the economy in Canada is an open economy, the balance of trade can serve to provide an alternative solution to the rate of unemployment in the Western provinces of Canada. It is undeniable that the level of export in Canada is abysmal as a result of the decline in crude oil prices. Consequently, the balance of trade has worsened. To correct, the balance of commerce, the government may employ several mechanisms. Devaluation of currency to make export less expensive may help correct the unfavorable balance of trade caused by the declining oil prices.
In conclusion, the IS-LM model is arguably the most useful macroeconomic tool in the economy. The model analyzes the economic health and provides a solution for the manipulation of the economic variables when the economic health worsens.
Michael Unemployment: why the ‘worst is yet to come’ amid oil shock. The Globe and Mail Journal. Babad (March 13, 2015) Last updated (Saturday 14th March 2015)