Unemployment & inflation presentation

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Transcript of Unemployment & inflation presentation

  • 1. UNEPLOYMENT OR INFLATION REAL ALTERNATIVE?

2. Could the Bee ever be Unemployed? 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 soundWell qualified Willing to work at prevailing wage rateBUT DOES NOT GET JOB, THIS SITUATION IS CALLED UNEMPLOYMENT 4. Adult Population Labour Force Labour Force Participation Rate Unemployment Rate Discouraged Worker 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 ofthe economy Labour Force Participation Rate Unemployment management is one of the toughest jobs of every governmentin the world. Along with price level, unemployment is probably the most observableeconomic indicator that the general public complains about their government. Unemployment rate can be anywhere between 1% ~ 30% (beyond is verymuch unlikely), and a healthy economy is believed to have an unemploymentrate around 5%. Unemployment rate is highest among young workers aged between 15 and24. 6. Employment rates in Europe Source: Eurostat 7. Natural rate of unemployment Source: http://tutor2u.net/economics/content/topics/unemp/natural_rate.htm 8. NAIRU non-accelerating inflation rate of unemployment 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. 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. 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. 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. 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. 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. 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. 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. Costs of unemployment Social (margin, crime, etc.) Individual (psychological) Consumer pesimism (can cause the spiral ofstagflation) 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. 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. 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. Fisher law conclusion The price level depends on the quantity of money incirculation and money supply decides on inflatioon This approach dominates in economics and influences the moderation in money supply 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. Types of inflation Cost pushed Demand driven Structural 23. EXPECTED INFLATION RATE In1968 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. EXPECTED INFLATION RATE AND THE SHORT-RUN PHILLIPS CURVE In1968 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. EXPECTED INFLATION RATE AND THE SHORT-RUN PHILLIPS CURVE Changes in the expected rate of inflation affectthe 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. EXPECTED INFLATION RATE AND THE SHORT-RUN PHILLIPS CURVE Therelationship 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. WHAT DETERMINES THE EXPECTED RATE OF INFLATION? People base their expectations about inflation onexperience. 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. THE NATURAL RATE HYPOTHESIS Apersistent 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. THE LONG-RUN PHILLIPS CURVE The long-run Phillips curve is vertical becauseany 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. 30. THE LONG-RUN PHILLIPS CURVE 31. DISINFLATION A persistent attempt to keep unemployment belowthe 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