Unemployment & inflation presentation


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Unemployment & inflation presentation

  2. 2. Could the Bee ever be Unemployed?
  3. 3. In economics, unemployment refers to the condition of unwanted job losses, or willing workers without jobs. The willingness of the unemployed worker to be employed is the key to the idea. A person who is :Physically Fit Mentally sound Well qualified Willing to work at prevailing wage rate BUT DOES NOT GET JOB, THIS SITUATION IS CALLED UNEMPLOYMENT
  4. 4.  Adult Population  Labour Force  Labour Force Participation Rate  Unemployment Rate  Discouraged Worker
  5. 5.  Unemployment is lack of full utilization of resources, and eats up the production of the economy. Unemployment is highly and negatively correlated with the productivity of the economy Labour Force Participation Rate  Unemployment management is one of the toughest jobs of every government in the world.  Along with price level, unemployment is probably the most observable economic indicator that the general public complains about their government.  Unemployment rate can be anywhere between 1% ~ 30% (beyond is very much unlikely), and a healthy economy is believed to have an unemployment rate around 5%.  Unemployment rate is highest among young workers aged between 15 and 24.
  6. 6. Employment rates in Europe Source: Eurostat
  7. 7. Natural rate of unemployment Source: http://tutor2u.net/economics/content/topics/unemp/natural_rate.htm
  8. 8. NAIRU non-accelerating inflation rate of unemployment
  9. 9. Seasonal unemployment refers to a situation where a number of persons are not able to find jobs during some months of the year. Example: Agriculture is a seasonal activity. There is an increased demand for labour at the time of sowing, harvesting, weeding and threshing. In between there is little or no demand for labour. Agricultural labour finds himself unemployed during this period. This is called seasonal unemployment.
  10. 10. Because of business cycles, many firms reduce the demand for inputs, including labor in recessional periods when production declines. Cyclical unemployment is used to refer to the fluctuation in unemployment i.e. the unemployment caused by economic recessions. Cyclical unemployment can be zero in full expansions during a business cycle.
  11. 11. Unemployment caused by technological changes or new methods of production in an industry or business. Example: The evolution of the automobile assembly plant. In the beginning, everything on the line was done by humans in order to build a car. The assembly line itself was a great technological innovation. Today, robots are employed for much of the hand-work humans used to do.
  12. 12. This is a type of voluntary unemployment that arises because of the time needed to match job seekers with job openings. Just as friction always takes place before the slider comes to its final position on the surface, people need time to find the best job, thus voluntarily rubbing back and forth between choices and staying unemployed Example: When you make up your mind and set off looking for a better job and abandoning the current one, you are in the frictional unemployment labor force.
  13. 13. This unemployment arises due to structural change in dynamic economy. Unemployment caused by massive mismatch of skills or geographic location is noted as structural unemployment. Example: Heavy Manufacture (mining) - Manufacture now involves machines so humans are no longer needed for the harder work. Structural unemployment poses more of a problem because workers must seek jobs elsewhere or must develop the skills demanded. The process is full of pain and frustration, and may lead to negative impacts on society.
  14. 14. When more people are engaged in some activity than the number of person required for that, this is called disguised unemployment. Disguised unemployment exists where part of the labor force is either left without work or is working in a redundant manner where worker productivity is essentially zero. Example: An agricultural field require 4 laborers but people engaged in this activity is 6 then this unemployment for 2 labors is called disguised unemployment
  15. 15. The term "underemployment" has three distinct related meanings.  a situation in which someone with excellent job qualifications is working in a position which requires lesser qualifications  working part time when one would prefer to be working full time.  it is a form of overstaffing in which employees are not being fully utilized. Example: An engineering working as a pizza delivery man. He is considered to be underemployed and underutilized by the economy as he in theory can provide a greater benefit to the overall economy if he were working as an engineer.
  16. 16. Inflation vs. Unemployment criticism     Coincidence or cause-effect relationship Naive concept within the complex economic world Pretext to expand expenditures or money supply With context to the Long Run Phillips Curve was the Short run only the coincidence?  Do LPC really exist?  Polish research in 90’ shows that the higher public deficit the lower growth rate and higher U– it is totally opposite to theory  It seems that different factors influence inflation and unemployment
  17. 17. Costs of unemployment  Social (margin, crime, etc.)  Individual (psychological)  Consumer pesimism (can cause the spiral of stagflation)  To GDP (Okun law – when U grows by 1% over natural unemployment rate the GDP falls by 3 %)  Other costs  Think: who benefits from unemployment
  18. 18. Costs of inflation  Loses of cashholders  Loses of institutional creditors  Loses of bonds holders  Loses of employees and entrepreneurs  Loses of taxpayers  Loses of pensionaires  Think: who benefits from inflation?
  19. 19. Fisher law MV = PQ where:  M – money supply  V – velocity of money  P – price level  Q – the quantity of goods and services When V and Q are constant in the short run then P depends on M
  20. 20. Fisher law conclusion  The price level depends on the quantity of money in circulation and money supply decides on inflatioon  This approach dominates in economics and influences the moderation in money supply
  21. 21. Doubts?  Can the central bank influence the money supply in the     fixed exchange rates environment? Is money supply shaped by export surpluses of certain countries and the central bank must exchange foreign curriencies into the domestic money on demand ? Can shortterm employees’ transfers function in the similar way as export surpluses? Can inflow or outflow of foreign investment will not influence the money supply instead of the central bank? Conclusion: in the small open economy the central bank has a limited opportunity to control money supply.
  22. 22. Types of inflation  Cost pushed  Demand driven  Structural
  23. 23. EXPECTED INFLATION RATE  In 1968 two economists, Milton Friedman (University of Chicago) and Edmund Phelps (Columbia University), independently set forth a hypothesis: “that expectations about future inflation directly affect the present inflation rate”.  Today, most economist accept that the expected inflation rate (the rate of inflation that employers and workers expect in the near future) is the most important factor affecting inflation, other than unemployment rate.
  24. 24. EXPECTED INFLATION RATE AND THE SHORT-RUN PHILLIPS CURVE  In 1968 two economists, Milton Friedman (University of Chicago) and Edmund Phelps (Columbia University), independently set forth a hypothesis: “that expectations about future inflation directly affect the present inflation rate”.  Today, most economist accept that the expected inflation rate (the rate of inflation that employers and workers expect in the near future) is the most important factor affecting inflation, other than unemployment rate.
  25. 25. EXPECTED INFLATION RATE AND THE SHORT-RUN PHILLIPS CURVE  Changes in the expected rate of inflation affect the short-run trade-off between unemployment and inflation, and shift the short-run Phillips curve.  An increase in expected inflation shifts the short-run Phillips curve upward, so that the actual rate of inflation at any given unemployment rate is higher.
  26. 26. EXPECTED INFLATION RATE AND THE SHORT-RUN PHILLIPS CURVE  The relationship between the changes in expected inflation and changes in actual inflation is one-to-one.  When the expected inflation rate increases, the actual inflation rate at a given unemployment rate will increase by the same amount.  When the expected inflation rate falls, the actual inflation rate at any given level of unemployment will fall by the same amount.
  27. 27. WHAT DETERMINES THE EXPECTED RATE OF INFLATION?  People base their expectations about inflation on experience.  For example, if the inflation rate has been at about 3% during the last few years, people will expect it to be at around 3% in the near future.
  28. 28. THE NATURAL RATE HYPOTHESIS A persistent attempt to trade off lower unemployment for higher inflation leads to accelerating inflation over time.  To avoid accelerating inflation over time, the unemployment rate must be high enough that the actual rate of inflation matches the expected rate of inflation.  This relationship between accelerating inflation and the unemployment rate is known as the natural rate hypothesis.
  29. 29. THE LONG-RUN PHILLIPS CURVE  The long-run Phillips curve is vertical because any unemployment rate below the NAIRU leads to ever-accelerating inflation.  The Phillips curve shows that there are limits to expansionary policies because an unemployment rate below the NAIRU cannot be maintained in the long run.
  31. 31. DISINFLATION  A persistent attempt to keep unemployment below the natural rate leads to accelerating inflation that becomes incorporated in expectations.  To reduce inflationary expectations policy makers need to run the process in reverse: the need to adopt contractionary policies that keep the unemployment rate above the natural rate for an extended amount of time.  This process of bringing down inflation that has become embedded in expectations is called disinflation.
  32. 32. DISINFLATION  Disinflation can be very expensive, as it requires reducing GDP in the short term.  The justification for paying these costs is that they lead to a permanent gain. Although the economy does not recover the short-term losses caused by disinflation, it no longer suffers from the costs associated with persistently high inflation.  These costs can be reduced if policy makers explicitly state their determination to reduce inflation, as a clearly announced, credible policy of disinflation can reduce expectations of future inflation and shift the short-run Phillips curve downward.
  33. 33. DEFLATION  Deflation, like inflation, produces winners and losers, but in the opposite direction.  Because of the falling price level, a dollar in the future has a higher real value than a dollar today.  Lenders, who are owed money, gain because the real value of the borrower’s payment increases.  Borrowers lose because the real debt rises.
  34. 34. IRVING FISHER  Fisher claimed that the effects of deflation on borrowers and lenders can worsen an economic slump.  Deflation takes real resources away from borrowers and redistributes them to the lenders.  Borrowers, who lose from deflation, are already short of cash, and will be forced to cut their spending sharply when their debt burden rises.  Lenders, however, are less likely to increase spending in the same degree when the values of the loans they own rise.
  35. 35. DEBT DEFLATION  The overall effect is that deflation reduces aggregate demand, which deepens an economic slump, which in a vicious cycle, may lead to further deflation.  Debt deflation is the reduction in aggregate demand (AD) caused by the increase in the real burden of outstanding debt caused by deflation.
  36. 36. THE ZERO BOUND ON THE NOMINAL INTEREST RATE  Expected deflation affects the nominal interest rate, the same way expected inflation does.  However, there is a limit to how much deflation can fall to, as the nominal interest rate could not go below zero, as this would mean that lenders would have to pay the borrowers to borrow money.  This is called the zero bound: There is a zero bound on the nominal interest rate, as it cannot go below zero.
  37. 37. THE LIQUIDITY TRAP  When there is a situation like the previous one, in which conventional monetary policy to fight a slump, cutting interest rates, can’t be used because nominal interest rates are up against the zero bound is known as the liquidity trap.  This happens when there is a sharp reduction in demand for loanable funds, which is the result of arriving at the zero bound and still having a depressed economy which would benefit from cutting interest rates.
  38. 38. LIQUIDITY TRAP  So if the economy is depressed, with a negative GDP gap and unemployment above the NRU, the central bank may want to respond by cutting interest rates as to increase AD.  However, with nominal interest rate already zero, the central bank cannot push it down any further, because banks would refuse to lend and consumers and firms would refuse to spend because, with a negative inflation rate and a 0% nominal interest rate, holding cash would yield a positive rate of return. Any further increase in the monetary base would either be held in bank vaults or as cash, without being spent.
  39. 39. Inflation & Phillips curve:  The inflation rate is the percentage change in the price level.  The Phillips Curve shows the relationship between the inflation rate and the unemployment rate.
  40. 40. Causes of Inflation:  Demand-pull inflation is inflation initiated by an increase in aggregate demand. • Cost-push, or supply-side, inflation is inflation caused by an increase in costs.
  41. 41. Demand pull : Increase in AD can be due to a fiscal or monetary policy, thus increasing prices
  42. 42. Cost push: Upward shift of the AS will be due to increase in costs due to increase in price of inputs.
  43. 43. Stagflation:  Stagflation occurs when output is falling at the same time that prices are rising.  One possible cause of stagflation is an increase in costs.
  44. 44. Combination of both:
  45. 45. Philips Curve:  It is a statistical relationship between unemployment and money wage inflation.  Rate of inflation= rate of wage growth less rate of productivity growth.
  46. 46. Phillips Curve:  1958 – Professor A.W. Phillips  Expressed a statistical relationship between the rate of growth of money wages and unemployment from 1861 – 1957  Rate of growth of money wages linked to inflationary pressure  Led to a theory expressing a trade-off between inflation and unemployment
  47. 47. The Philips Curve Wage growth % (Inflation) The Phillips Curve shows an inverse relationship between inflation and unemployment. It suggested that if governments wanted to reduce unemployment it had to accept higher inflation as a trade-off. 2.5% Money illusion – wage rates rising but individuals not factoring in inflation on real wage rates. 1.5% 4% 6% PC1 Unemployment (%)
  48. 48. The Philips Curve To counter the rise in unemployment, government once again injects resources into the economy – the result is a shortThere is athe economy starts with an inflation rate of Assume in unemployment but higher term fallshort term fall in unemployment but at a cost of higher high unemployment at 7%. 1% but very inflation. Individuals now base their inflation. This higher inflation fuels further wage negotiations on expectations of higher inflation in Government takes measures to reduce expectation If higher wages are granted then that the next period. of an expansionary fiscal policy firms unemployment by higher inflation and so the costs rise –continues. The long run Phillips pushes AD to the right shed labour and process they start to(see the AD/AS diagram on unemployment creeps back up to 7% again. slide 15) Curve is vertical at the natural rate of unemployment. This is how economists have explained the movements in the Phillips Curve and it is termed the Expectations Augmented Phillips Curve. Long Run PC  inflation 3.0% 2.0% 1.0% PC1 7% PC3 PC2 Unemployment
  49. 49.  7% becomes the natural rate in this case.  Whenever unemployment rate is pushed below natural rate , wages increase, pushing up costs. This leads to a lower level of output which pushes unemployment back to the natural rate.
  50. 50. Countering inflation: Demand -pull Reduce demand by higher taxation, lower govt. expenditure, lower govt borrowing, higher interest rates Cost push Take steps to reduce production costs by deregulating labour markets, encouraging greater productivity, apply control over wages and prices Import factors reduce quantity of imports or their prices via trade policies.
  51. 51. Controlling inflation (cont) Excessive growth on money supply Reduce money supply by cutting down on public sector borrowing Funding Govt borrowing from non bank Reduce bank lending Maintain interest rates Expectations of inflation Pursue policies which indicate Govt’s determination to reduce inflation
  52. 52. Okun’s Law:   1. 2. 3. 4. This law states that 1 extra point of unemployment costs 2%of GDP Consequences of unemployment: Loss of potential output Loss of human capital Increasing inequalities and distribution of income Social costs
  53. 53. The Labor Market, Unemployment, and Inflation
  54. 54. The Classical View of the Labor Market  The view of classical economists was that if the quantity of labor demanded and the quantity of labor supplied are brought into equilibrium by rising and falling wage rates, there should be no persistent unemployment above the frictional and structural amount.
  55. 55. The Classical View of the Labor Market • The labor supply curve illustrates the amount of labor that households want to supply at the particular wage rate.  The labor demand curve illustrates the amount of labor that firms want to employ at the particular wage rate.
  56. 56. The Classical View of the Labor Market • Classical economists believe that the labor market always clears.  If labor demand decreases, the equilibrium wage will fall. Everyone who wants a job at W* will have one. There is always full employment in this sense.
  57. 57. Unemployment can be broadly classified under two broad categories –  VOLUNTARY UNEMPLOYMENT - Unemployment that results when resources which are willing and able to engage in production choose not to produce output. These are resources (especially labor) that decide to leave one job, often in search of another.  INVOLUNTARY UNEMPLOYMENT - The contrast to voluntary unemployment is involuntary unemployment, in which resources are forced out of work. Involuntary unemployment is also known as Forced Unemployment.
  58. 58. Labour Force - The total number of people employed or seeking employment in a country or region. Also called work force. 47, 83, 00,000 - Labour Force available in India in the year 2010 (source – World Bank Indicator)
  59. 59. The rate of unemployment in a country is measured by the following formula:Unemployment rate = Labour force – Employed labour X 100 Labour Force Or Unemployment rate = Number of unemployed X 100 Labour Force
  60. 60. THANK YOU
  61. 61. References  http://www.slideshare.net/UdayBansode/unemploym ent-15749757 Dec 24, 2012. by Uday Bansode  http://www.slideshare.net/zatrutakrew/unemployme nt-and-inflation-presentation-5860685 Nov 22, 2010. by Damian Suchocki  http://www.slideshare.net/zatrutakrew/unemployme nt-and-inflation-presentation-5860685 Nov 22, 2010. by Damian Suchocki
  62. 62. Reference cont…  http://www.slideshare.net/kinnar32/inflation- unemployment Jan 27, 2012 by Kinnar Majithia  http://www.slideshare.net/opaprb/ch149301586?qid=ad79dd4c-5ee0-4c91-a74b9954dfadb0c3&v=qf1&b=&from_search=5 Sep 18, 2011. by Noel Buensuceso