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 sound
Well qualified
Willing to work at prevailing wage rate
BUT 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 of
the economy Labour Force Participation Rate
 Unemployment management is one of the toughest jobs of every government
in the world.
 Along with price level, unemployment is probably the most observable
economic indicator that the general public complains about their government.
 Unemployment rate can be anywhere between 1% ~ 30% (beyond is very
much unlikely), and a healthy economy is believed to have an unemployment
rate around 5%.
 Unemployment rate is highest among young workers aged between 15 and
24.

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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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

16. 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.

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. 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. 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. 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. 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. 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. Types of inflation
 Cost pushed
 Demand driven
 Structural

24. EXPECTED INFLATION RATE
 In
1968 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
 In
1968 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.

26. EXPECTED INFLATION RATE AND
THE SHORT-RUN PHILLIPS CURVE
 Changes in the expected rate of inflation affect
the 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.

27. EXPECTED INFLATION RATE AND
THE SHORT-RUN PHILLIPS CURVE
 The
relationship 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.

28. WHAT DETERMINES THE EXPECTED
RATE OF INFLATION?
 People base their expectations about inflation on
experience.
 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.

29. THE NATURAL RATE HYPOTHESIS
A
persistent 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.

30. THE LONG-RUN PHILLIPS CURVE
 The long-run Phillips curve is vertical because
any 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.

31. THE LONG-RUN PHILLIPS CURVE

32. DISINFLATION
 A persistent attempt to keep unemployment below
the 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 is called
disinflation.

33. DISINFLATION
 Disinflation can be very expensive, as it requires
reducing GDP in the short term.
 The justification for paying these costs is that they
lead to a permanent gain. Although the economy
does not recover the short-term losses caused by
disinflation, it no longer suffers from the costs
associated with persistently high inflation.
 These costs can be reduced if policy makers explicitly
state their determination to reduce inflation, as a
clearly announced, credible policy of disinflation can
reduce expectations of future inflation and shift the
short-run Phillips curve downward.

34. DEFLATION
 Deflation, like inflation, produces winners and
losers, but in the opposite direction.
 Because of the falling price level, a dollar in the
future has a higher real value than a dollar today.
 Lenders, who are owed money, gain because the
real value of the borrower’s payment increases.
 Borrowers lose because the real debt rises.

35. IRVING FISHER
 Fisher claimed that the effects of deflation on
borrowers and lenders can worsen an economic
slump.
 Deflation takes real resources away from borrowers
and redistributes them to the lenders.
 Borrowers, who lose from deflation, are already short
of cash, and will be forced to cut their spending
sharply when their debt burden rises.
 Lenders, however, are less likely to increase spending
in the same degree when the values of the loans they
own rise.

36. DEBT DEFLATION
 The overall effect is that deflation reduces
aggregate demand, which deepens an economic
slump, which in a vicious cycle, may lead to
further deflation.
 Debt deflation is the reduction in aggregate
demand (AD) caused by the increase in the real
burden of outstanding debt caused by deflation.

37. THE ZERO BOUND ON THE
NOMINAL INTEREST RATE
 Expected deflation affects the nominal interest rate,
the same way expected inflation does.
 However, there is a limit to how much deflation can
fall to, as the nominal interest rate could not go
below zero, as this would mean that lenders would
have to pay the borrowers to borrow money.
 This is called the zero bound: There is a zero bound
on the nominal interest rate, as it cannot go below
zero.

38. THE LIQUIDITY TRAP
 When there is a situation like the previous one,
in which conventional monetary policy to fight a
slump, cutting interest rates, can’t be used
because nominal interest rates are up against the
zero bound is known as the liquidity trap.
 This happens when there is a sharp reduction in
demand for loanable funds, which is the result of
arriving at the zero bound and still having a
depressed economy which would benefit from
cutting interest rates.

39. LIQUIDITY TRAP
 So if the economy is depressed, with a negative GDP
gap and unemployment above the NRU, the central
bank may want to respond by cutting interest rates
as to increase AD.
 However, with nominal interest rate already zero, the
central bank cannot push it down any
further, because banks would refuse to lend and
consumers and firms would refuse to spend
because, with a negative inflation rate and a 0%
nominal interest rate, holding cash would yield a
positive rate of return. Any further increase in the
monetary base would either be held in bank vaults or
as cash, without being spent.

40. Inflation & Phillips curve:
 The inflation rate is the percentage
change in the price level.
 The Phillips Curve shows the
relationship between the inflation rate
and the unemployment rate.

41. Causes of Inflation:
 Demand-pull inflation is inflation initiated by an
increase in aggregate demand.
• Cost-push, or supply-side, inflation is inflation
caused by an increase in costs.

42. Demand pull :
Increase in AD can
be due to a fiscal or
monetary policy,
thus increasing
prices

43. Cost push:
Upward shift of the
AS will be due to
increase in costs due
to increase in price of
inputs.

44. Stagflation:
 Stagflation occurs when output is falling at the same
time that prices are rising.
 One possible cause of stagflation is an increase in
costs.

45. Combination of both:

46. Philips Curve:
 It is a statistical relationship between unemployment
and money wage inflation.
 Rate of inflation= rate of wage growth less rate of
productivity growth.

47. Phillips Curve:
 1958 – Professor A.W. Phillips
 Expressed a statistical relationship between the
rate of growth
of money wages and unemployment
from 1861 – 1957
 Rate of growth of money wages
linked to inflationary pressure
 Led to a theory expressing a trade-off between
inflation and unemployment

48. The Philips Curve
Wage growth %
(Inflation)
The Phillips Curve shows an
inverse relationship between
inflation and unemployment. It
suggested that if governments
wanted to reduce unemployment
it had to accept higher inflation as
a trade-off.
2.5%
Money illusion – wage rates rising
but individuals not factoring in
inflation on real wage rates.
1.5%
4%
6%
PC1
Unemployment (%)

49. The Philips Curve
To counter the rise in unemployment,
government once again injects resources
into the economy – the result is a shortThere is athe economy starts with an inflation rate of
Assume in unemployment but higher
term fallshort term fall in unemployment but at a
cost of higher high unemployment at 7%.
1% but very inflation. Individuals now base their
inflation. This higher inflation fuels further
wage negotiations on expectations of higher inflation in
Government takes measures to reduce
expectation If higher wages are granted then that
the next period. of an expansionary fiscal policy firms
unemployment by higher inflation and so the
costs rise –continues. The long run Phillips
pushes AD to the right shed labour and
process they start to(see the AD/AS diagram on
unemployment creeps back up to 7% again.
slide 15)
Curve is vertical at the natural rate of
unemployment. This is how economists
have explained the movements in the
Phillips Curve and it is termed the
Expectations Augmented Phillips
Curve.
Long Run PC
 inflation
3.0%
2.0%
1.0%
PC1
7%
PC3
PC2
Unemployment

50.  7% becomes the natural rate in this case.
 Whenever unemployment rate is pushed below
natural rate , wages increase, pushing up costs. This
leads to a lower level of output which pushes
unemployment back to the natural rate.

51. Countering inflation:
Demand -pull
Reduce demand by higher taxation, lower govt.
expenditure, lower govt borrowing, higher interest
rates
Cost push
Take steps to reduce production costs by deregulating
labour markets, encouraging greater productivity, apply
control over wages and prices
Import factors
reduce quantity of imports or their prices via trade
policies.

52. Controlling inflation (cont)
Excessive
growth on
money supply
Reduce money supply by cutting down on public
sector borrowing
Funding Govt borrowing from non bank
Reduce bank lending
Maintain interest rates
Expectations of
inflation
Pursue policies which indicate Govt’s determination to
reduce inflation

53. Okun’s Law:


1.
2.
3.
4.
This law states that 1 extra point of unemployment
costs 2%of GDP
Consequences of unemployment:
Loss of potential output
Loss of human capital
Increasing inequalities and distribution of income
Social costs

54. The Labor Market,
Unemployment, and
Inflation

55. The Classical View of the Labor
Market
 The view of classical economists was that if the
quantity of labor demanded and the quantity of labor
supplied are brought into equilibrium by rising and
falling wage rates, there should be no persistent
unemployment above the frictional and structural
amount.

56. The Classical View of the Labor
Market
•
The labor supply curve
illustrates the amount of labor
that households want to
supply at the particular wage
rate.
 The labor demand
curve illustrates the
amount of labor that
firms want to employ at
the particular wage rate.

57. The Classical View of the Labor
Market
•
Classical economists believe
that the labor market always
clears.
 If labor demand
decreases, the
equilibrium wage will
fall. Everyone who wants
a job at W* will have one.
There is always full
employment in this
sense.

58. Unemployment can be broadly classified under two broad categories –
 VOLUNTARY UNEMPLOYMENT - Unemployment that results when
resources which are willing and able to engage in production choose not to
produce output. These are resources (especially labor) that decide to leave one
job, often in search of another.
 INVOLUNTARY UNEMPLOYMENT - The contrast to voluntary
unemployment is involuntary unemployment, in which resources are forced out
of work. Involuntary unemployment is also known as Forced Unemployment.

59. Labour Force - The total number of people employed or seeking employment
in a country or region. Also called work force.
47, 83, 00,000 - Labour Force available in India in the year 2010 (source –
World Bank Indicator)

60. The rate of unemployment in a country is measured by the following
formula:Unemployment rate = Labour force – Employed labour
X
100
Labour Force
Or
Unemployment rate = Number of unemployed
X
100
Labour Force

61. THANK YOU

62. References
 http://www.slideshare.net/UdayBansode/unemploym
ent-15749757
Dec 24, 2012. by Uday Bansode
 http://www.slideshare.net/zatrutakrew/unemployme
nt-and-inflation-presentation-5860685
Nov 22, 2010. by Damian Suchocki
 http://www.slideshare.net/zatrutakrew/unemployme
nt-and-inflation-presentation-5860685
Nov 22, 2010. by Damian Suchocki

63. Reference cont…
 http://www.slideshare.net/kinnar32/inflation-
unemployment
Jan 27, 2012 by Kinnar Majithia
 http://www.slideshare.net/opaprb/ch149301586?qid=ad79dd4c-5ee0-4c91-a74b9954dfadb0c3&v=qf1&b=&from_search=5
Sep 18, 2011. by Noel Buensuceso