unemployment and inflation economics. unemployment economist’s definition: those of working age,...
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Unemployment and Inflation
Economics
Unemployment
• Economist’s definition:
• Those of working age, who are without work, but who are available for work at current wage rates.
Two measures of unemployment.
• Claimant count
• ‘People of working age, who are without work, who are able and willing to work and looking for work for four weeks.
UNEMPLOYED
From Jobs
People made redundant
People sacked
People resigning
People temporarily laid off
From outside the labour force
School/college leavers
People returning to the labour force
To outside the labour force
People who give up looking for a job
Retirement age
Temporarily withdraw from labour force
Emigrate
To Jobs
People taking new jobs
Returning to jobs.
Causes of unemployment
• Cyclical unemployment• Frictional/Search unemployment• Structural Unemployment• Technological Unemployment• Regional Unemployment• Seasonal Unemployment
Costs to the economy
• Unemployment benefits• Loss of tax revenue• Increased crime• Wasting skills• Social problems
Kazakhstan’s Unemployment Rate
Inflation
• The rate at which P for goods and services
• purchasing power
• Inflation is measured by CPI Consumer Prices Index
Inflation Measured by the CPI (Consumer Prices Index)
Inflation 1993 - 2017
Source http://www.tradingeconomics.com/kazakhstan/inflation-cpi
World Inflation Rates
Costs of Inflation
• Menu costs• Redistribution• Uncertainty• Bad for Balance of Payments• Resources
Causes of InflationDemand Pull• Rising AD
Cost Push• Diminishing resources• External Shocks• Wage Push• M prices rising.• Tax Push
Who loses out from Inflation?
• Businesses• People on fixed incomes
Who Benefits from Inflation?
• People in debt
Relationship between Inflation and Unemployment.
• 1958 Phillips showed the statistical relationship between wage inflation and unemployment in the UK between 1861 and 1957
Inflation
Unemployment5%
0
THE PHILLIPS CURVE
The reason the curve is bowed in to the origin is as AD expands, initially there would be plenty of surplus labour, which would meet the extra demand without the need to raise wages very much.
Questions
• In England in the 1970s, the price of oil increased by 4x. England M all our oil from OPEC.
• This D for M, and D for domestically produced goods.
• Therefore what happened to unemployment?• What happened to inflation?• How would this be illustrated on the Philips Curve?
Outward Shifting Phillips Curve
• Oil price shocks
• Expansionary fiscal policy
• High Interest Rates
Inward Shifting Phillips Curve
• More flexible labour force• Use of inflation targets by Monetary Policy
Committee.• Advancements in technology leading to lower
unit costs.• Increased competition from abroad, forcing
firms to keep their costs down.
NAIRU Non-Accelerating Inflation Rate of Unemployment.
• Is the level of unemployment which exists when the AD for labour = AS of labour at the going wage rate.
• There is no upward pressure on the wage rate or inflation.
• NAIRU consists of voluntary, frictional and structural unemployment.
Inflation
Unemployment5%
0
THE LONG RUN PHILLIPS CURVE
0% inflation and 5% unemployment
Then there is a sudden increase in AD
Expectations Augmented Phillips Curve
• When unemployment drops below the NAIRU (non-accelerating inflation rate of unemployment), increasing inflationary expectations shift the Phillips Curve outward.
Expectations Augmented Phillips Curve
• Higher costs and decreasing aggregate demand push unemployment up and inflation down along the new Phillips Curve.
Expectations Augmented Phillips Curve
• There is no permanent inflation-unemployment tradeoff. At the NAIRU unemployment rate (for example), inflation may be low or it may be high, once inflationary expectations adjust.
Kazakhstan’s GDP per Capita