Unemployment & Inflation

Presented to: Ms. Sadaf RazaqUnemployment & Inflation

Group MembersMuhammad Amir MushtaqJawad NafeesJahenzed AltafZeshanNoman Bajwa

Muhammad Amir MushtaqEmploymentUnemploymentTypes of Unemployment

Full EmploymentA society is almost never fully employed, but one of the goals is to reach full employment. Full employment has two conditions: Everyone who wants to work is working, and the rate of inflation is stable. When the economy is at full employment, there is no cyclical unemployment but still frictional and structural unemployment. This is defined as a full employment

Defining EmploymentThe most frequently discussed symptom of a recession is unemployment.An employed person is any person 16 years old or older who works for pay, either for someone else or in his or her own business for 1 or more hours per week,

UnemploymentAn unemployed person is a person 16 years old or older who:is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.A person who is not looking for work, either because he or she does not want a job, is not in the labor force.

Measuring Unemployment

Measuring UnemploymentComputing the unemployment rate for the month of July 2013:Labor force: 141.39 millionEmployed: 133.47 millionUnemployed: 7.92 million

Types of UnemploymentStructural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.Geographical based mismatchSkills based mismatchFrictional Unemployment : This is the desirable process of finding work, employers looking for the right worker. In order to help accelerate this process, governments assist people looking for jobs with programs and qualification surveys.Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions.

Structural unemployment arises because the skills demanded by employers do not match the skills of the unemployed, or the unemployed do not live where the jobs are locatedStructural unemployment is reduced as adjustments come about in the economyGeographical mismatch vs. Skill mismatch Cyclical unemployment occurs because of declines in the economys aggregate production during recessions

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Types of UnemploymentSeasonal unemployment is caused by seasonal shifts in labor supply and demandExamples: construction, agriculture, Life Guards The natural rate of unemployment is the unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.

Unemployment Insurance (UI)Temporary income provided to unemployed workers who actively seek employment and who meet other qualifications

UI pays part of a workers former wages for a limited time after losing his/her job.UI increases search unemployment, because it:reduces the opportunity cost of being unemployedreduces the urgency of finding workThe longer a worker is eligible for UI, the longer the duration of the average spell of unemployment.

Other Factors1. Minimum wage laws2. Labor unions3. Efficiency wages (employers offer high wage as incentive for worker productivity and loyalty

Noman BajwaThe minimum wageLabor unionsEfficiency Wage Theory

The minimum wageThe minimum wage is well below the eqm wage for most workers, so it cannot explain the majority of natural rate unemployment. However, the minimum wage may exceed the eqm wage of unskilled workers, especially teenagers. If so, then we would expect that increases in the minimum wage would increase unemployment among these groups.

The minimum wage in the real world:In Sept 1996, the minimum wage was raised from $4.25 to $4.75. Heres what happened:

Other studies: A 10% increase in the minimum wage increases teenage unemployment by 1-3%.

Unemployment rates, before & after3rd Q 19961st Q 1997Teenagers16.6%17.0%Single mothers8.5%9.1%All workers5.3%5.3%

UnemploymentCHAPTER SIXMacroeconomics 5th Eidition By : N Gregory Mankiw 15

Labor unionsUnions exercise monopoly power to secure higher wages for their members. When the union wage exceeds the eqm wage, unemployment results. Employed union workers are insiders whose interest is to keep wages high. Unemployed non-union workers are outsiders and would prefer wages to be lower (so that labor demand would be high enough for them to get jobs).

Efficiency Wage TheoryTheories in which high wages increase worker productivity: attract higher quality job applicants increase worker effort and reduce shirkingreduce turnover, which is costly improve health of workers (in developing countries) The increased productivity justifies the cost of paying above-equilibrium wages. The result: unemployment

Zeshan

Problems with UnemploymentAdvantages of UnemploymentMeasuring UnemploymentSolutions

Problems with unemploymentCost to Individual Lower income and quality of lifeLower self-esteem, leading to stress and erosion of mental healthCost To SocietyAreas with high unemployment can see increased crime, like gang activity.

Problems with unemploymentCost To The EconomyThe average unemployed person costs the British government 8000 pounds a yearLoss of outputDiminished tax baseIncreased taxes, increased burdenIncreased difficulty for labor market entrants - employers have more choices, they favor experienced workersUnemployed workers lose their skills

Advantages of unemploymentIts very unpopular phenomena because no one like employment but still there are few things which can attracts to investors or businessman. These are as follows:Spare labour-- could be attractive for investors.Wages wont be high - they can pay people less as they know others are available.

Measuring Unemployment

X 100

Solutions to unemploymentBoost aggregate demand e.g. increase gov. spending, build statues (creating jobs), reduce taxesInterest rates reduced: More investment, more money borrowed, more money spend, more jobsSupply side economics: Train the workers make them more skilful. Also reduce taxes to increase working incentivesLower the retirement ages/ raise school leaving age: It reduces unemployment however these days is unlikelyConscription: The army counts as employment

Jawad NafeesInflationWhat economist saysHyperinflationCosts of Inflation

Inflation

Introduction:Collective increase in the supply of money, in money incomes, or in prices refers to inflation. Inflation is generally thought of as an undue rise in the general level of prices.

Definition:Inflation is a situation whereby there is a continuous and persistent rise in the general price level.

Sustained inflation is an increase in the overall price level that continues over a significant period.

According to Meyer: An increase in the prices that occurs after full employment has been attained.According to Ackely: A persistent and appreciable rise in the general level or average of prices.According to Crowther: In the state of inflation the prices are rising i. e., the value of money is falling.According to Coulbourn: In inflation, too much money chases too few goods.

Types of InflationDemand Pull InflationThis is demand side inflation. It simply means that when there is an increase in aggregate demand. Without any corresponding increase in aggregate supply the price level will rise.Cost Push InflationIt is supply side inflation. If there is increase in prices it will results in fall in aggregate supply. It is the reason of increase in cost of production.

Other Types of InflationOpen InflationIf there is no control over rise in prices, it will be determined by free forces of demand and supply.Profit InflationProfit inflation is the result of the greed of businessmen. It usually occurs in such economy, which are dominated by monopolies.Deficit InflationGovernment has to borrow form banks and non-bank & internal and external resources in case of deficit financing. It also caused inflation named as deficit inflation. Devaluation InflationDevaluation also leads to inflation. Devaluation decreases the purchasing power of our currency that results in inflation.Ceiling InflationInflation that occurs due to various prices ceiling enforced by government. Price ceiling are set by government to maintain prices of certain essential goods at a determined level.

HyperinflationHyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a warDeflation A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending.StagflationA condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.Disinflation A slowing in the rate of price inflation. Disinflation is used to describe instances when the inflation rate has reduced marginally over the short term. Although it is used to describe periods of slowing inflation, disinflation should not be confused with deflation.

Costs of inflationCreates uncertaintyExports become less competitive Poor people are more vulnerable to inflation. They have fewer choices to hedge against inflation and, in addition, they cannot borrow money.If actual inflation proves higher than expected inflation, then borrowers gain at the expense of lenders. The money they will be paying back will be worth less than expected

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Noman BajwaCauses of InflationHow do we measure inflationPrice index

Causes of InflationCost push: Inflation that occurs when there is an increase in the cost of production.Demand pull: Inflation that occurs when a sector of the economy increases the demand for goods and services.Excess monetary growth: The money supply increases, and prices increase

How do we Measure Inflation?CONSUMER PRICE INDEX (CPI)It is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Taking price changes for each item in the predetermined basket of goods and averaging them calculate the CPI; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Calculating the CPI for a single itemCPI 2/CPI 1: Price2/Price I

Where 1 is usually the comparison year and CPI1 is usually an index of 100. Alternately, the CPI can be performed as:CPI = Updated cost__ x 100 Base period cost

Calculating the Consumer Price Index (CPI)STEP 1 : Survey Consumers to Determine a Fixed Basket of Goods.Basket = 4 hot dogs, 2 hamburgers

STEP 2: Find the Prices of Each Good in Each Year.

YearPrice of Hot DogsPrice of Hamburgers____________________________________________________________________2011$2$42012 3 5 4 6

STEP 3: Compute the Cost of the Basket of Goods in Each Year.______________________________________________________________________2011 ($2 per hot dog x 4 hot dogs) + ($4 per hamburger x 2 hamburgers) = $16 per basket2012 ($3 per hot dog x 4 hot dogs) + ($5 per hamburger x 2 hamburgers) = $22 per basket2013 ($4 per hot dog x 4 hot dogs) + ($6 per hamburger x 2 hamburgers) = $28 per basket

Calculating the Consumer Price Index (CPI)STEP 4: Choose One Year as a Base Year (2011) and Compute the CPI in Each Year_______________________________________________________________________2011($16/$16) x 100 = 1002012($22/$16) x 100 = 137.5 ($28/$16) x 100 = 175

STEP 5: Use the CPI to Compute the Inflation Rate from Previous Year_______________________________________________________________________2012 (137.5-100)/ 100 x 100 = 37.5%2013 (175-137.5)/ 137.5 x 100 = 27.27%

Producer Price IndexA Producer Price Index (PPI) measures price change from the perspective of the seller. It measures average changes in prices received by domestic producers for their output. The PPI shows trends within the wholesale markets (the PPI was once called the Wholesale Price Index), manufacturing industries and commodities markets.

GDP DeflatorGDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.

GDP Deflator = Nominal GDP x 100 Real GDP

JahenzebEffects of Inflation

Controlling Inflation

Phillips Curve

Why is Inflation So Unpopular?As an economic problem, inflation is widespread since it affects everyone Workers wages may not keep up with inflationThose on fixed incomes are seriously affectedLong-term contracts are difficult to negotiate

Effects of Inflation:KEYNESIANS THEORY:According to Keynesian, inflation can be caused by increase in demand and/or increase in cost.MONETARIST THEORY:The monetarist theory suggests the money supply determines inflation, which occurs when the rate of a country's income rises faster than economic growth.DEMAND-PULL INFLATION:The demand-pull theory suggests that inflation occurs when aggregate demand exceeds aggregate supply. This scenario is typically associated with a strong economy and low unemployment, when more people put money into the economy.

Controlling Inflation:Fiscal Policy: Fiscal policies are effective in increasing the leakage rates from the circular income flow, thereby rejecting all further additions into this particular flow of income.Following are a few types of fiscal policies commonly employed:Lowering the expenses on governmental levelA fall in the borrowing amounts in the government sectors, on an annual basisHigh direct taxes, for reducing the disposable income.

Monetary Policy:Monetary policies have a great role to play in controlling Inflation:A rise in the interest rate discourages borrowing from both companies and households. When interest rates increase, it simultaneously encourages the saving rate, owing to an escalation in the opportunity cost of expenditure.There may also be a fall in the commercial investments, due to a rise in the costs of borrowing money. This exerts a direct influence on a handful of planned investment-related projects, which turn out to be unprofitable. This leads to a fall in the collective demand

Inflation and Interest RatesInflation creates a difference between real and nominal interest ratesReal rate = nominal rate - inflation rate

Inflation risk makes some lenders offer adjustable-rate home loans

The Phillips CurveThe essence of the Phillips Curve is that there is a short-term trade-off between unemployment and inflation. But the original Phillips Curve has come under sustained attack in particular from monetarist economists, and when we consider the data for unemployment and inflation in Britain over the last fifteen years. We will find that the nature of the trade-off has certainly changed for the economy and others as well.

The Basic Phillips Curve Idea Economic Trade-OffsThe key to understanding this trade-off is to consider the possible inflationary effects in both labour and product markets arising from an increase in national income, output and employment.The labour market: As unemployment falls, some labour shortages may occur where skilled labour is in short supply. This puts extra pressure on wages to rise, and since wages are usually a high percentage of total costs, prices may rise as firms pass on these costs to their customers