Unemployment and inflation presentationPresentation Transcript
MACROECONOMICS UNEPLOYMENT OR INFLATION REAL ALTERNATIVE?
UNEMPLOYMENT Definition – unemploymentis an economicphenomenonthatpeoplewho want to work and areable to workcannotworkbecause of theshortage of work(job places) Unemploymentrate = rate of theunemployed to thetotallaborforce (U) Laborforce: theemployed + theunemployed (LF) Thekeyissueishow to counttheunemployed Registeredunemployed – thosewhoareregisteredatlaborofficesorintheotherwayofficially Theunemployed – based on survey of economicactivities of population: those of theadultpopulationwhodid not workeven single dayintheproceedengmonth Theunemploymentratedepends on thedefinition of theunemployed
Manipulationswithunemploymentrate We canincreasethebase (laborforce) by addingcertaingroups to thelaborforce ( M. Tatcher, addingentrepreneurs to thebase) We candemotivatepeople to register (distantlaboroffice, lot of formalities) We candecreaseunemploymentbenefits to demotivatepeople to register for benefits We can make peopleashamed to tell thesurveyofficersthattheyhad not earnedanymoneyinthelastmonth Conclusion – theunemeploymentratecan be maniputaled but thereal problem remains : therearepeoplewhocannotreallyfindjobsaccordingly to theirresidencelocation and qualifications Employmentrate - percentage of theemployed to thepopulationaged 18-64 in EU (itdiffersfrom country to country)
LaborForceSurvey LFS (LFS), which covers persons aged 15 and more, members of households in dwellings selected ona random basis. The survey is conducted by the continuous observation method, i.e., economic activityof the population is observed in each week during the whole quarter. Since the I quarter of 2003, dataof the LFS have been generalized on the basis of the balance of population compiled with the use of theresults of the Population and Housing Census 2002. Data presented by age groups have beencalculated on the basis of the exact date of birth, until the I quarter of 2006 — with the exception ofpersons aged 15 — they were presented according to the year of birth. The main criterion in dividing the population into economically active (employed and unemployedpersons) and inactive is work, i.e., performing, holding or looking for work. Employed persons are persons who during the reference week: — performed, for at least 1 hour any work providing earnings or income, or assisted (without wages orsalaries) in maintaining a family-owned farm in agriculture or conducting a family-owned businessoutsideagriculture, — formally had work but did not perform it (e.g., due to illness, vacation, a break in company activity,bad weather); if the break in work exceeded 3 months, since 2006 the additional criterion in caseof paid employees (employees hired on the basis of an employment contract and outworkers) wasthe fact of receiving at least 50% of the hitherto remuneration.
LFS cont. Unemployed persons are persons aged 15—74, who simultaneously fulfil three conditions: — within the reference week were not employed, — actively sought work, i.e., within a 4-week period undertaken any real action (the last week beingthe reference week) to find work, — were available for work within a fortnight period following the reference week. The unemployed also include persons who have found work and were waiting to begin it withina 3-month period, as well as persons who were available for that work. Economically inactive persons are persons who are not classified either as employed or unemployed.
Employmentratesin EuropeSource: Eurostat
Unemploymentratesin EuropeSource: Eurostat
Hours of workweeklySource: Eurostat
TYPES OF UNEMPLOYMENT Frictional Unemployment: - is caused by imperfect information and frictionsintheeconomy - employers are not aware of all available workers and their qualifications, and, - available workers are not fully aware of all the jobs being offered by employers. - somepeoplechangejobs and aretemporaryunemployed Structural Unemployment:
caused by an imperfect match of employee skills to skill requirements of the available jobs.
Cyclical Unemployment (Keynesian): - caused by changesineconomydue to thebusiness cycle conditions - intherecessioncyclical unemployment increases. Classicalunemployment: - caused by too high level of workingcompesationabovethelevel of labor market equilibrium
CLASSICAL VS KEYNESIAN UNEMPLOYMENT Source: http://www.s-cool.co.uk/alevel/economics/unemployment-and-the-phillips-curve/unemployment--the-details.html
Natural rate of unemployment The Natural Rate of Unemployment is the rate of Unemployment when the Labour market is in equilibrium. It is the difference between those who would like a job at the current wage rate and those who are willing and able to take a job. The Natural Rate of Unemployment will therefore include: frictional unemployment structural unemployment E.g. a worker who is not able to get a job because he doesn’t have the right skills The natural rate of unemployment is unemployment caused by supply side factors rather than demand side factors Monetarists argue that the Natural Rate of Unemployment occurs when the Long Run Phillips Curve crosses the x axis The Natural Rate of Unemployment is sometimes known as the Non accelerating inflation rate of Unemployment NAIRUThis is because when unemployment is 4% there is no tendency for inflation to increase In this example the Natural rate of unemployment is 4%. If the govt increased AD there may be a temporary fall in unemployment but in the Long Run it would return to the natural rate of 4% Sometimes the natural rate is known as the full employment level of unemployment This is because even if the economy is operating at full capacity and there is no demand deficient unemployment then there will still be some unemployment caused by supply side factors. Source: http://www.economicshelp.org/macroeconomics/unemployment/natural_rate.html
Natural rate of unemploymentSource: http://tutor2u.net/economics/content/topics/unemp/natural_rate.htm
NAIRUnon-accelerating inflation rate of unemployment
NAIRU The NAIRU conceptmaintainsthat when unemployment is at the rate defined by the redline, inflation will be stable. However, in the short-run policymakers will face an inflation-unemployment rate tradeoff marked by the "Initial Short-Run Phillips Curve“.Policymakers can therefore reduce the unemployment rate temporarily, moving from point A to point B through expansionary policy. However, according to the NAIRU, exploiting this short-run tradeoff will raise inflation expectations, shifting the short-run curve rightward to the "New Short-Run Phillips Curve" and moving the point of equilibrium from B to C. Thus the reduction in unemployment below the "Natural Rate" will be temporary, and lead only to higher inflation in the long run. The name "NAIRU" arises because with actual unemployment below it, inflation accelerates, while with unemployment above it, inflation decelerates. With the actual rate equal to it, inflation is stable, neither accelerating nor decelerating. One practical use of this model was to provide an explanation for stagflation, which confounded the traditional Phillips curve.
Inflationvs. Unemploymentcriticism Coincidenceorcause-effectrelationship Naiveconceptwithinthecomplexeconomicworld Pretext to expandexpendituresormoneysupply Withcontext to the Long Run PhillipsCurve was theShort run onlythecoincidence? Do LPC reallyexist? Polishresearchin 90’ showsthatthehigher public deficitthelower growth rate and higher U– itistotallyopposite to theory Itseemsthatdifferentfactors influence inflation and unemployment
Costs of unemployment Social (margin, crime, etc.) Individual (psychological) Consumer pesimism (cancausethe spiral of stagflation) To GDP (Okun law – when U grows by 1% over natural unemploymentratethe GDP falls by 3 %) Othercosts Think: whobenefitsfromunemployment
Costs of inflation Loses of cashholders Loses of institutionalcreditors Loses of bondsholders Loses of employees and entrepreneurs Loses of taxpayers Loses of pensionaires Think: whobenefitsfrominflation?
Fisher law MV = PQ where: M – moneysupply V – velocity of money P – pricelevel Q – thequantity of goods and services WhenV and Q areconstantintheshort run then P depends on M
Fisher law conclusion Thepriceleveldepends on thequantity of moneyincirculation and moneysupplydecides on inflatioon Thisapproachdominatesineconomics and influencesthemoderationinmoneysupply
Doubts? Canthe central bank influence themoneysupplyinthefixedexchangerates environment? Ismoneysupplyshaped by export surpluses of certaincountries and the central bank mustexchange foreign currienciesintothedomesticmoney on demand ? Canshorttermemployees’ transfersfunctioninthesimilarway as export surpluses? Caninfloworoutflow of foreign investment will not influence themoneysupplyinstead of the central bank? Conclusion: inthesmallopeneconomythe central bank has a limited opportunity to controlmoneysupply.
Types of inflation Costpushed Demanddriven Structural