Unemployment and inflation presentation

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Unemployment and inflation presentation

  1. 1. UNEPLOYMENT OR INFLATION REAL ALTERNATIVE?
  2. 2. UNEMPLOYMENT  Definition – unemployment is an economic phenomenon that people who want to work and are able to work cannot work because of the shortage of work (job places)  Unemployment rate = rate of the unemployed to the total labor force (U)  Labor force: the employed + the unemployed (LF)  The key issue is how to count the unemployed  Registered unemployed – those who are registered at labor offices or in the other way officially  The unemployed – based on survey of economic activities of population: those of the adult population who did not work even single day in the proceedeng month  The unemployment rate depends on the definition of the unemployed
  3. 3. Manipulations with unemployment rate  We can increase the base (labor force) by adding certain groups to the labor force ( M. Tatcher, adding entrepreneurs to the base)  We can demotivate people to register (distant labor office, lot of formalities)  We can decrease unemployment benefits to demotivate people to register for benefits  We can make people ashamed to tell the survey officers that they had not earned any money in the last month  Conclusion – the unemeployment rate can be maniputaled but the real problem remains : there are people who cannot really find jobs accordingly to their residence location and qualifications  Employment rate - percentage of the employed to the population aged 18-64 in EU (it differs from country to country)
  4. 4. Labor Force Survey LFS  (LFS), which covers persons aged 15 and more, members of households in dwellings selected on a random basis. The survey is conducted by the continuous observation method, i.e., economic activity of the population is observed in each week during the whole quarter. Since the I quarter of 2003, data of the LFS have been generalized on the basis of the balance of population compiled with the use of the results of the Population and Housing Census 2002. Data presented by age groups have been calculated on the basis of the exact date of birth, until the I quarter of 2006 — with the exception of persons aged 15 — they were presented according to the year of birth.  The main criterion in dividing the population into economically active (employed and unemployed persons) 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 or salaries) in maintaining a family-owned farm in agriculture or conducting a family-owned business outside agriculture, — 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 case of paid employees (employees hired on the basis of an employment contract and outworkers) was the fact of receiving at least 50% of the hitherto remuneration.
  5. 5. 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 being the 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 within a 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.
  6. 6. Employment rates in Europe Source: Eurostat
  7. 7. Unemployment rates in Europe Source: Eurostat
  8. 8. Hours of work weeklySource: Eurostat
  9. 9. TYPES OF UNEMPLOYMENT Frictional Unemployment: - is caused by imperfect information and frictions in the economy - 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. - some people change jobs and are temporary unemployed Structural Unemployment: - caused by an imperfect match of employee skills to skill requirements of the available jobs. Cyclical Unemployment (Keynesian): - caused by changes in economy due to the business cycle conditions - in the recession cyclical unemployment increases. Classical unemployment: - caused by too high level of working compesation above the level of labor market equilibrium
  10. 10. CLASSICAL VS KEYNESIAN UNEMPLOYMENTSource: http://www.s-cool.co.uk/alevel/economics/unemployment-and-the-phillips-curve/unemployment--the-details.html
  11. 11. 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 NAIRU This 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
  12. 12. Natural rate of unemployment Source: http://tutor2u.net/economics/content/topics/unemp/natural_rate.htm
  13. 13. Original Phillips curve
  14. 14. Theoretical Phillips curve
  15. 15. NAIRU non-accelerating inflation rate of unemployment
  16. 16. NAIRU  The NAIRU concept maintains that when unemployment is at the rate defined by the red line, 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.
  17. 17. 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
  18. 18. 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
  19. 19. 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?
  20. 20. 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
  21. 21. 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
  22. 22. 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.
  23. 23. Types of inflation  Cost pushed  Demand driven  Structural

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