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Unemployment And Inflation
Firstly, we pay thanks to “ALMIGHTY ALLAH” who helped us to achieve our target. No report is the result of an individual effort only. This report would not have been possible without the help of first and foremost our course instructor Syed Zia Abbas Rizvi, thank you for acquainting us with the world of Macro Economics. As one a scholar said, “My parents brought me from the skies to the earth, but my teacher put me back on the skies” and so did Mr Zia Abbas Rizvi.
Macro Economics Report
Unemployment And Inflation
Pakistan has undergone a significant economic growth during last few years, but the core problems of the economy are still unsolved. Inflation and unemployment remain still the major hurdles to the growth of Pakistan’s economy. Our aim is to find the determinants of inflation and unemployment, causes and corrective measures of it. The last five years are reported as highly inflationary due to expansionary monetary policy and high oil prices. Domestic production should be encouraged instead of imports; investment should be done in capital goods instead of luxuries. Agriculture sector should be given subsidies, foreign investment should be attracted. Developed nations should be requested for financial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage.
Macro Economics Report
Unemployment And Inflation
Our study will be focused on various aspects of inflation and unemployment in Pakistan over a period of time.
OBJECTIVE OF THE PROJECT:
1. Present the scenario of inflation and unemployment in Pakistan. 2. Highlight the measures used by the SBP (State Bank of Pakistan) to control inflation and unemployment.
Unemployment, as defined by the International Labor Organization, occurs when people are without jobs and they have actively looked for work within the past four weeks. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. There remains considerable theoretical debate regarding the causes, consequences and solutions for unemployment. Classical, neoclassical and the Austrian School of economics focus on market mechanisms and rely on the invisible hand of the market to resolve unemployment.
In traditional societies, salary jobs did not exist yet, because money was not invented yet. These cultures lived off the land directly, and the land belonged to the tribe or to no one. Everyone knew how to build shelter and make food. When these cultures invented currency and moved to the cities, they began to depend on money to buy food from a middle man, instead of growing, gathering, or hunting the food directly from nature. Dependence on jobs to make money to buy food and shelter was the beginning of unemployment. Recognition of unemployment occurred slowly as economies across the world industrialized and bureaucratized. The recognition of the concept of "unemployment" is best exemplified through the well documented historical records in England.
Macro Economics Report
whereas involuntary unemployment exists because of the socio-economic environment (including the market structure. Most economists have argued that unemployment increases the more the government intervenes into the economy to try to improve the conditions of those with jobs. and classical unemployment are largely involuntary in nature. minimum wage laws raise the cost of laborers with few skills to above the market equilibrium. and the level of aggregate demand) in which individuals operate. causing the number of job-seekers to exceed the number of vacancies. industrial decline. Voluntary unemployment includes workers who reject low wage jobs whereas involuntary unemployment includes workers fired due to an economic crisis. Though there have been several definitions of voluntary and involuntary unemployment in the economics literature. in practice. as macroeconomic forces cause microeconomic unemployment which can boomerang back and exacerbate these macroeconomic forces. government intervention. resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed. much or most of frictional unemployment is voluntary. CLASSICAL UNEMPLOYMENT: Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. while classical (natural) unemployment may result from the legislative and economic choices made by labour unions or political parties. So. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust. including cyclical or Keynesian unemployment. However. the existence of structural unemployment may reflect choices made by the unemployed in the past.Unemployment And Inflation TYPES & THEORIES: Economists distinguish between various overlapping types of and theories of unemployment. On the other hand. a simple distinction is often applied. company bankruptcy. frictional unemployment. Laws restricting layoffs Macro Economics Report Page 5 . Voluntary unemployment is attributed to the individual's decisions. cyclical unemployment. so that even if all vacancies were to be filled. or organizational restructuring. Some additional types of unemployment that are occasionally mentioned are seasonal unemployment. structural unemployment and classical unemployment. This happens with cyclical unemployment. some unemployed workers would still remain. structural unemployment. hardcore unemployment. In these terms. and hidden unemployment. the distinction between voluntary and involuntary unemployment is hard to draw. For example. since it reflects individual search behavior.
Unemployment And Inflation made businesses less likely to hire in the first place. wages are sticky and do not fall to meet the equilibrium level. Demand for most goods and services falls. as hiring becomes more risky. Classical economists reject the conception of cyclical unemployment and alternatively suggest that the invisible hand of free markets will respond quickly to unemployment and underutilization of resources by a fall in wages followed by a rise in employment. also known as deficient-demand unemployment. this argument is criticized for ignoring numerous external factors and overly simplifying the relationship between wage rates and unemployment. occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Keynesian economists on the other hand see the lack of demand for jobs as potentially resolvable by government intervention. Hayek and others from the Austrian school of economics argue that if governments intervene through monetary policy to lower interest rates this will exacerbate unemployment by preventing the market from responding effectively. and mass unemployment results. that other factors may also affect unemployment. With cyclical unemployment. It is noted that there can be unemployment when job market is in equilibrium. the number of unemployed workers exceeds the number of job vacancies. Another intervention involves an Macro Economics Report Page 6 . some workers would still remain unemployed.in other words. so that even if full employment was attained and all open jobs were filled. Some associate cyclical unemployment with frictional unemployment because the factors that cause the friction are partially due to cyclical variables. CYCLIC OR KEYNESSIAN UNEMPLOYMENT: Cyclical or Keynesian unemployment. One suggested interventions involves deficit spending to boost employment and demand. less production is needed and consequently fewer workers are needed. However. Similarly. leaving many young people unemployed and unable to find work. Its name is derived from the frequent shifts in the business cycle although unemployment can also be persistent as occurred during the Great Depression of the 1930s.
Workers are pitted against one another at the service of increasing profits for owners. However. Yet. unemployment seems inefficient since unemployed workers do not increase profits. According to Karl Marx. The function of the proletariat within the capitalist system is to provide a "reserve army of labour" that creates downward pressure on wages. At first glance. MARXIST THEORY OF UNEMPLOYMENT: It is in the very nature of the capitalist mode of production to overwork some workers while keeping the rest as a reserve army of unemployed paupers. it does not benefit workers. unemployment is profitable within the global capitalist system because unemployment lowers wages which are costs from the perspective of the owners.Unemployment And Inflation expansionary monetary policy that increases the demand of money which should reduce interest rates which should lead to an increase in non-governmental spending. the only way to permanently eliminate unemployment would be to abolish capitalism and the system of forced competition for wages and then shift to a socialist or Macro Economics Report Page 7 . According to Marx. Theory of Surplus Value. This is accomplished by dividing the proletariat into surplus labour (employees) and under-employment (unemployed). – Marx. unemployment is inherent within the unstable capitalist system and periodic crises of mass unemployment are to be expected. This reserve army of labour fight among themselves for scarce jobs at lower and lower wages. From this perspective low wages benefit the system by reducing economic rents. Capitalism unfairly manipulates the market for labour by perpetuating unemployment which lowers laborers' demands for fair wages.
Unemployment And Inflation communist economic system. However. demand theory holds that this means that if the unemployment rate gets "too low. The "natural" rate of unemployment is defined as the rate of unemployment that exists when the labour market is in equilibrium and there is pressure for neither rising inflation rates nor falling inflation rates. people could be thrown out of work involuntarily and not be able to find acceptable new employment. An alternative technical term for this rate is the NAIRU or the Non-Accelerating Inflation Rate of Unemployment. The tendency for government is to curtail and eliminate unemployment through increases in benefits and government jobs. FULL EMPLOYMENT: Short-Run Phillips Curve before and after Expansionary Policy. a suddenly unemployed person must meet their survival needs either by getting a new job at any price. or joining the underground economy of the hustler. Involuntary unemployment does not exist in agrarian societies nor is it formally recognized to exist in underdeveloped but urban societies. the existence of persistent unemployment is proof of the inability of capitalism to ensure full employment. No matter what its name. In such societies. Some demand theory economists see the inflation barrier as corresponding to the natural rate of unemployment. it is possible to abolish cyclical unemployment by increasing the aggregate demand for products and workers. In consequence. eventually the economy hits an "inflation barrier" imposed by the four other kinds of unemployment to the extent that they exist. with Long-Run Phillips Curve (NAIRU) In demand-based theory. Keynes argued that neo-classical economic theory did not apply during recessions because of excessive savings and weak private investment in an economy. This conflict between the neoclassical and Keynesian theories has had strong influence on government policy. INVOLUNTARY UNEMPLOYMENT: In The General Theory. and to encourage the job-seeker to both consider new careers and relocation to another city. For contemporary Marxists." inflation will get worse and worse (accelerate) in the absence of wage and price controls (incomes policies). Macro Economics Report Page 8 . such as the mega-cities of Africa and of India/Pakistan. becoming an entrepreneur.
it would be impossible to attain this full-employment target using only demandside Keynesian stimulus without getting below the NAIRU and suffering from accelerating inflation (absent incomes policies). This type of "full employment" unemployment would correspond to only frictional unemployment (excluding that part encouraging the McJobs management strategy) and would thus be very low.Unemployment And Inflation One of the major problems with the NAIRU theory is that no one knows exactly what the NAIRU is (while it clearly changes over time). making it hard to use the NAIRU in policy-making. Training programs aimed at fighting structural unemployment would help here. Macro Economics Report Page 9 . it implies that official unemployment statistics provide a poor guide to what unemployment rate coincides with "full employment". normative. definition of full employment might be called the ideal unemployment rate. It would exclude all types of unemployment that represent forms of inefficiency. STRUCTUAL UNEMPLOYMENT: "Driver looking for work" Unemployed German laborer in 1949 Structural unemployment occurs when a labour market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs. The margin of error can be quite high relative to the actual unemployment rate. Another. To the extent that hidden unemployment exists. However.
The fact that aggregate demand can be raised to deal with this problem suggests that this problem is instead one of cyclical unemployment. Some economists see this scenario as occurring under British Prime Minister Margaret Thatcher during the 1970s and 1980s. the demand side must grow sufficiently quickly to absorb not only the growing labour force but also the workers made redundant by increased labour productivity. Much technological unemployment (e. since it is a type of unemployment that is linked to certain kinds of jobs (construction work. while their skills (including job-searching skills) become "rusty" and obsolete. simple demand-side stimulus will not work to easily abolish this type of unemployment. Otherwise.g. As indicated by Okun's Law. This means that they may not fit the job vacancies that are created when the economy recovers. FRICTIONAL UNEMPLOYMENT: Macro Economics Report Page 10 . The implication is that sustained high demand may lower structural unemployment. technological unemployment might refer to the way in which steady increases in labour productivity mean that fewer workers are needed to produce the same level of output every year. we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 21st century. except to say that it lasts longer.Unemployment And Inflation Structural unemployment is hard to separate empirically from frictional unemployment. it means that many of the unemployed become disheartened. Structural unemployment may also be encouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand. migratory farm work). As with frictional unemployment. due to the replacement of workers by machines) might be counted as structural unemployment. Seasonal unemployment may be seen as a kind of structural unemployment. This theory of persistence in structural unemployment has been referred to as an example of path dependence or "hysteresis". The most-cited official unemployment measures erase this kind of unemployment from the statistics using "seasonal adjustment" techniques. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. Alternatively.
taste. Macro Economics Report Page 11 . the economy suffers. convex curve that shows a correlation between the unemployment rate on one axis and the vacancy rate on the other. since some work will not get done. Therefore. It is sometimes called search unemployment and can be voluntary based on the circumstances of the unemployed individual. risk or compromise. attitude. An increase (decrease) in labour market frictions will shift the curve outwards (inwards). Changes in the supply of or demand for labour caused movements along this curve. The frictions in the labour market are sometimes illustrated graphically with a Beveridge curve.Unemployment And Inflation Beveridge curve of 2004 job vacancyand unemployment rate from the United States Bureau of Labour Statistics Frictional unemployment is the time period between jobs when a worker is searching for. or transitioning from one job to another. Workers as well as employers accept a certain level of imperfection. and assistance such as daycare centers. advice. but usually not right away. payment. a downward-sloping. work-time. if the search takes too long and mismatches are too frequent. This is in fact beneficial to the economy since it results in a better allocation of resources. seasonal industries. governments will seek ways to reduce unnecessary frictional unemployment through multiple means including providing education. However. they will invest some time and effort to find a better match. and a mismatch can result between the characteristics of supply and demand. so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment. training. Such a mismatch can be related to skills. Frictional unemployment exists because both jobs and workers are heterogeneous. Frictional unemployment is always present in an economy. location. which means that increases or decreases in unemployment are normally under-represented in the simple statistics. New entrants (such as graduating students) and re-entrants (such as former homemakers) can also suffer a spell of frictional unemployment. and a multitude of other factors.
 Individuals who are actively seeking job placement must make the effort to: be in contact with an employer. The unemployment rate is expressed as a percentage. In other words. there is equilibrium with respect to Macro Economics Report Page 12 . have job interviews.Unemployment And Inflation HIDDEN UNEMPLOYMENT: Hidden. even though they are not employed. those who are of working age but are currently in full-time education are usually not considered unemployed in government statistics. and is calculated as follows: UNEMPLOYMENT RATE = UNEMPLOYED WORKERS TOTAL LABOUR FORCE As defined by the International Labour Organization. In addition. EQULIBRIUM UEMPLOYMENT The equilibrium unemployment level is the difference between those who are employed at a given wage rate and those who can work. send out resumes. but would prefer to be working. economists typically focus on the unemployment rate. due to the way the statistics are collected. currently available to work. Since not all unemployment may be "open" and counted by government agencies. The statistic also does not count the "underemployed" . This corrects for the normal increase in the number of people employed due to increases in population and increases in the labour force relative to the population. contact job placement agencies. MEASUREMENT: Though many people care about the number of unemployed individuals. Those who have given up looking for work (and sometimes those who are on Government "retraining" programs) are not officially counted among the unemployed. official statistics often underestimate unemployment rates. unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics.those with part time or seasonal jobs who would rather have full time jobs. submit applications. or some other means of active job searching within the prior four weeks. In many countries only those who have no work but are actively looking for work (and/or qualifying for social security benefits) are counted as unemployed. Simply looking at advertisements and not responding will not count as actively seeking job placement. or covered. and have actively searched for work. respond to advertisements. official statistics on unemployment may not be accurate. Because of hidden unemployment. The same applies to those who have taken early retirement to avoid being laid off. "unemployed workers" are those who are currently not working but are willing and able to work for pay.
9 4 Burkina Faso 77 17 5 Turkmenistan 60 18 Macedonia.Unemployment And Inflation the demand and supply of labour. however. WORLD STATISTICS OF UNEMPLOYMENT Rank Country Unemployment rate (%) (top 78 countires) 1 2 3 Nauru 90 Liberia 85 Zimbabwe 80 15 Swaziland 40 27 Dominica 23 16 Marshall Islands 36 Yemen 35 28 South Africa 22. DISEQUILIBRIUM UNEMPLOYMENT It happens when the aggregate demand for labour is less than the aggregate supply of labour at the current real wage rate.5 19 20 Mali 30 30 29 Micronesia. unemployment still exists because a proportion of the labour force are not willing to work at that time and that wage rate. Federated States of 22 30 31 Gabon 21 Cape Verde 21 6 Cocos (Keeling) Islands 60 7 8 9 10 11 12 Djibouti 59 Zambia 50 Senegal 48 Nepal 46 Lesotho 45 Gaza Strip 41. The Former Yugoslav Republic of 33.8 35 Saint Lucia 20 13 14 Kenya 40 Afghanistan 40 25 Bosnia and Herzegovina 29 26 Mayotte 25.7 Iraq 18.4 36 37 38 Sudan 18.3 Mauritania 32 21 22 Libya 30 33 Mozambique 21 Equatorial Guinea 30 Cameroon 30 Comoros 20 23 34 East Timor 20 24 American Samoa 29.2 18 Page 13 Kyrgyzstan Macro Economics Report .
3 74 Turks and Caicos Islands 10 75 Morocco 10 Puerto Rico 48 Maldives 14.4 63 Saudi Arabia 11.6 Iran 12.7 41 Netherlands Antilles 15.3 Croatia 13.7 Grenada 72 Turkey 10.2 42 55 56 57 58 Tonga 13 Jordan 12.6 Cook Islands 13.7 59 60 61 62 Albania 12.5 49 50 Tunisia 14.8 76 77 Poland 9.5 This entry contains the percent of the labor force that is without jobs. Source: CIA World Factbook EFFECTS OF UNEMPLOYMENT INDIVIDUAL:Unemployed individuals are unable to earn money to meet financial obligations.4 Colombia 11.5 Dominican Republic 15.5 Algeria 12.9 66 Guam 11.1 67 68 Ghana 11 Antigua and Barbuda 11 Jamaica 11 Guyana 11 Barbados 10.5 12. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or Macro Economics Report Page 14 .5 69 70 71 43 44 Saint Vincent and the Grenadines 15 45 46 47 Bahrain 15 Oman 15 Montenegro 14.3 53 54 Spain 13.Unemployment And Inflation 65 39 New Caledonia 17.7 78 Burma 9.8 Suriname 9.7 Georgia 13. Substantial underemployment might be noted.1 Saint Helena 14 64 French Polynesia 11.5 Niue 12 12 73 Saint Pierre and Miquelon 10.1 51 52 40 West Bank 16.5 Wallis and Futuna 15.
2% in total mortality. According to a study published in Social Indicator Research." Brenner found that for every 10% increase in the number of unemployed there is an increase of 1. turnover in most low-paying jobs is high. these jobs and unemployment are more complementary than they are substitutes.0% more arrests. In a prospective study of 9570 individuals over four years. mental stress. The authors suggested this may be due to conscientious people making different attributions about why they became unemployed.3% more cirrhosis cases. Unemployment increases susceptibility to malnutrition. highly conscientiousness people suffered more than twice as much if they became unemployed. typically does not replace 50% of the income one received on the job (and one cannot receive it forever). Dr. and 0. 1. But since it is difficult or impossible to get unemployment insurance benefits without having worked in the past. illness. the unemployed often end up tapping welfare programs such as Food Stamps or accumulating debt. Because unemployment insurance in the U. As for the impact of an economic downturn on crime.7% increase in cardiovascular disease. during the Great Depression the crime rate did not decrease. 1.Unemployment And Inflation eviction. even those who tend to be optimistic find it difficult to look on the bright side of things when unemployed. or through experiencing stronger reactions following failure. A more recent study by Christopher Ruhm on the effect of recessions on health found that several measures of health actually improve during recessions. Unemployment can cause underemployment. 4. Some hold that many of the low-income jobs are not really a better option than unemployment with a welfare state (with its unemployment insurance benefits).) Another cost for the unemployed is that the combination of unemployment. a 1. M.8% more assaults reported to the police. (These jobs are often held short-term. leading to depression. Not everyone suffers equally from unemployment. Macro Economics Report Page 15 . Across the United States the growing ranks of people made homeless in the foreclosure crisis are generating tent cities. either by students or by those trying to gain experience. Brenner conducted a study in 1979 on the "Influence of the Social Environment on Psychology. and fear of job loss can spur psychological anxiety. Using interviews and data from German participants aged 16 to 94 – including individuals coping with the stresses of real life and not just a volunteering student population – the researchers determined that even optimists struggled with being unemployed. and social responsibilities may push unemployed workers to take jobs that do not fit their skills or allow them to use their talents. and loss of self-esteem.S. lack of financial resources.7% more suicides.
10 years after the hyperinflation but in the midst of high unemployment. there is a trade-off between economic efficiency and unemployment: if the frictionally unemployed accepted the first job they were offered. they would be likely to be operating at below their skill level. However the direct connection between full Macro Economics Report Page 16 . in some cases leading to revolution. Since it is operating below its production possibility frontier. BENEFITS OF UNEMPLOYMENT: Unemployment is argued to be "beneficial" to the people who are not unemployed in the sense that it averts inflation. that keeps wages in check. and is blamed for damaging the credibility of democratic institutions. is attributed to the poor economic conditions in Germany at the time. but the Nazi party only assumed government in 1933. which itself has damaging effects. workers can lose their skills. which culminated in World War II and the deaths of tens of millions and the destruction of much of the physical capital of Europe. reducing the economy's efficiency. causing a loss of human capital. High unemployment can also cause social problems such as crime. which was contemporary with Hitler's Beer Hall Putsch of 1923. and particularly totalitarianism.Unemployment And Inflation SOCIAL:An economy with high unemployment is not using all of the resources. notably a high unemployment rate of above 20%. by providing (in Marxian terms) a reserve army of labour. Note that the hyperinflation in the Weimar republic is not directly blamed for the Nazi rise – the Inflation in the Weimar Republic occurred primarily in the period 1921–23. However. Being unemployed can also reduce the life expectancy of workers by about 7 years  High unemployment can encourage xenophobia and protectionism as workers fear that foreigners are stealing their jobs. available to it. see Great Depression in Central Europe for details. During a long period of unemployment. Efforts to preserve existing jobs of domestic and native workers include legal barriers against "outsiders" who want jobs. obstacles to immigration. SOCIO-POLITICAL:High levels of unemployment can be causes of civil unrest. specifically labour. it could have higher output if all the workforce were usefully employed. The fall of the Weimar Republic in 1933 and Adolf Hitler's rise to power. then it is very likely that crime levels within the economy will increase. and/or tariffs and similar trade barriers against foreign competitors. if people don't have as much disposable income as before.
Employers avoid shirking by preventing wages from decreasing so low that workers give up and become unproductive. This occurs because employers know that when wages decrease. unemployment was demonstrated to reduce inflation. Before current levels of world trade were developed. and only in the short term. since it is relatively easy to seek a new job without losing one's current one. These higher wages perpetuate unemployment while the threat of unemployment reduces shirking. or will demand increased wages and benefit. all focused toward the goal of developing more environmentally efficient methods for production and consumption might provide a more significant and lasting cumulative environmental benefit and reduced resource consumption. The inflation-fighting benefits to the entire economy arising from a presumed optimum level of unemployment has been studied extensively. the curve for the no-shirking condition (labeled NSC) goes to infinity at full employment. Full employment cannot be achieved because workers would shirk if they were not threatened with the possibility of unemployment. following the NAIRU/natural rate of unemployment theory. following the Phillips curve. This prevents wages from dropping to market clearing levels. As in the Marxist theory of unemployment. unemployment may promote general labour productivity and profitability by increasing employers' rationale for their monopsony-like power (and profits). The Shapiro-Stiglitz model suggests that wages are not bid down sufficiently to ever reach 0% unemployment. In the Shapiro-Stiglitz model of efficiency wages. However the tool of denying jobs to willing workers seems a blunt instrument for conserving resources and the environment—it reduces the consumption of the unemployed across the board. workers are paid at a level that dissuades shirking. If so the future economy and workforce would benefit from the resultant Macro Economics Report Page 17 . talents. or to decelerate inflation. Because of this. Optimal unemployment has also been defended as an environmental tool to brake the constantly accelerated growth of the GDP to maintain levels sustainable in the context of resource constraints and environmental impacts. Full employment of the unemployed workforce. special interests may also benefit: some employers may expect that employees with no fear of losing their jobs will not work as hard. According to this theory. workers will shirk and expend less effort. it may allow workers to find the jobs that better fit their tastes. and needs.Unemployment And Inflation local employment and local inflation has been disputed by some due to the recent increase in international trade that supplies low-priced goods even while local employment rates rise to full employment. And when more jobs are available for fewer workers (lower unemployment).
These unemployment benefits include unemployment insurance.S. and various societies have experienced close to full employment for extended periods. while in Australia the 1945 White Paper on Full Employment in Australia established a government policy of full employment. this is attributed to the public sector jobs' existence depending directly on the tax receipts from private sector employment. DEMAND SIDE SOLUTIONS: Many countries aid the unemployed through social welfare programs. to allow workers more time to search for a job.Unemployment And Inflation structural increases in the sustainable level of GDP growth. However. where the government guarantees work at a living wage. working less. Government-funded employment is not widely advocated as a solution to unemployment. Such critics often propose quitting jobs when possible. welfare and subsidies to aid in retraining. Temporary measures can include public works programs such as the Works Progress Administration. A direct demand-side solution to unemployment is government-funded employment of the able-bodied poor." and creating cultural norms where work is seen as unhealthy. unemployment compensation. creation of jobs which are "fun" as opposed to "work. particularly during the Post-World War II economic expansion. Some critics of the "culture of work" such as anarchist Bob Black see employment as overemphasized culturally in modern countries. The United Kingdom in the 1950s and 60s averaged 1. The main goal of these programs is to alleviate short-term hardships and. CONTROLLING OR REDUCING UNEMPLOYMENT: Societies try a number of different measures to get as many people as possible into work. reassessing the cost of living to this end. which provided jobs for the unemployed with harsh conditions and poor wages to dissuade their use. except in times of crisis. These people advocate an "anti-work" ethic for life. In the U. more importantly. the unemployment insurance allowance one receives is based solely on previous Macro Economics Report Page 18 .6% unemployment. resulting only in less output and more inflation. A modern alternative is a job guarantee. mainstream economic discussions of full employment since the 1970s suggest that attempts to reduce the level of unemployment below the natural rate of unemployment will fail. which policy lasted until the 1970s when the government ran out of money. This was notably implemented in Britain from the 17th century until 1948 in the institution of the workhouse.
markets reach equilibrium where supply equals demand. one must reside in their respective state for at least a year and. everyone who wants to sell at the market price can. The demand for labour in an economy is derived from the demand for goods and services. increasing employment. thus encouraging them to stay attached to the industry. In cases of highly seasonal industries the system provides income to workers during the off seasons. the demand for labour will increase. Supply-siders argue the reforms increase long-term growth. Other supply-side policies include education to make workers more attractive to employers. in the labour market this is classical unemployment. a number of scholars argue that the predicted negative impact is based on incoherent or simplistic logic that ignores mitigating environmental factors. Advocates of supply-side policies believe those policies can solve this by making the labour market more flexible. such as non-minimum wage labour markets including farm. the number applying for and receiving benefits increases during recessions. However. work. However. increasing employment and wages. family size.) and usually compensates for one-third of one's previous income. Monetary policy and fiscal policy can both be used to increase short-term growth in the economy. create jobs and reduce unemployment. increasing wages and employment. Some argue that minimum wages and union activity keep wages from falling. According to classical economic theory. Increases in the demand for labour will move the economy along the demand curve. As such. if the demand for goods and services in the economy increases. Although 90% of citizens are covered by unemployment insurance. The system was established by the Social Security Act of 1935. To qualify. specifically that no single entity is large enough to affect wage levels. This increased supply of goods and services requires more workers. of course. the labour market is not 100% efficient: it does not clear. They argue that the benefits of minimum wage laws outweigh the supposed but unproven costs. though it may be more efficient than bureaucracy. SUPPLY SIDE SOLUTIONS: However. increasing the demand for labour and decreasing unemployment. These include removing the minimum wage and reducing the power of unions. It is argued that supply-side policies. service and self employed workers. recent meta-analyzes involving many studies refute that there is any statistically significant. Further. Those who do not want to sell at this price do not. etc. Macro Economics Report Page 19 . less than 40% apply for and receive benefits. This assumes perfect competition exists in the labour market. which include cutting taxes on businesses and reducing regulation.Unemployment And Inflation income (not time worked. which means too many people want to sell their labour at the going price but cannot. negative impact of minimum wages on unemployment.
30 % 6.60 % 7.00 % 119 122 75 65 72 71 92 143 -1.79 % -20. This entry contains the percent of the labor force that is without jobs. 2004 est. 2007 est.52 % -13.) 14% (2009 est.Unemployment And Inflation UNEMPLOYMENT IN PAKISTAN: STATISTICS Unemployment rate: 15% (2010 est. The higher growth rate of population is one of the major cause of unemployment in Pakistan. Substantial underemployment might be noted.40 % 14.19 % Date of Information 2002 est.70 % 8.) note: substantial underemployment exists Year 2003 2004 2005 2006 2007 2008 2009 2010 Unemployment rate Rank Percent Change 7.14 % 89.28 % 7. 2008 est. 2003 est.85 % 32. Macro Economics Report Page 20 .50 % 5. 2009 est.48 % -1.80 % 7.60 % 6. 2006 est. 2005 est.
In fact. It also affects the employment rate of Pakistan. According to the Human Development Report on South Asia. In exact terms. the employment in the private sector has absolutely stopped because they shifted their capital to other countries because of the global economics condition and also as we are the front line state against war on terror. Less than three-quarters of its school-age population attends primary school. Pakistan’s labour force is growing at the rate of 2.6% plus substantial underemployment in 2007 and 7. In order to minimize the unemployment problem. Rapid mechanization and computer technology also causing unemployment. Although the growth rate is decreasing by the actual figure of population has increased from 85. a strict population policy maybe introduced. Expenditure on education as a percentage of GDP has been less than 2 % in the last decade. The rate of expansion in industrial sector is very slow.5% and 7. This shows the rapid rate of increase in population. it was 5. The population has been increasing.03 in 2003. unrest and violence. As we know that the Pakistan’s economy used to derive great benefit from overseas Pakistanis Macro Economics Report Page 21 .5% estimated in the year 2008. And investors are reluctant to invest here because of the political instability in the country. The socio economics system of Pakistan and institutions has failed to provide employment to the increasing labor force. The unemployment rate in Pakistan in the year 2007 and 2008 was estimated as 6. These facts are according to CIA world fact book which comprise of the percentage of labor force which is currently unemployed. The attitude of our youth towards the choice of a career is unrealistic and unproductive.4%. The level of unemployment in Pakistan is moving up day by day.10 million in 1981 to 149.5% in the year 2007. Our educational system is also responsible for increasing unemployment rate among the youth. and the unemployment rate is growing at an alarming rate of 6% per anum in the last five years.Unemployment And Inflation The resources of the country are limited because population has exceeded the optimum level. It can be clearly seen the Pakistan is suffering from over population and the being an underdeveloped country it is very difficult to control this. Nearly two-third of the total adult population can’t read or write.
Due to this.9% to GDP and 44% people get jobs from this sector directly or indirectly.Unemployment And Inflation and expatriate labour abroad. There is less availability of fertilisers. the economy’s capacity to generate employment opportunities has been decreasing. demand for labour has been decreased. Agriculture is the biggest sector of our economy that contributes 20. absence of land reforms and lack of Macro Economics Report Page 22 . Second is the backwardness of this sector. This was traditionally unskilled labour engaged in the construction boom of the post-1973 oil price hike shock. i. In the current situation more than 30 lakh people are unemployed in Pakistan and unemployment ratio is more than 12%. the opportunities for unskilled labour in Arab countries have been reducing due to the economic changes taking place there. The biggest reason of unemployment in Pakistan is concerned with the backwardness of agriculture sector. Unemployment in this sector is from two sides. First is due to the adoption of latest machinery and capital intensive technology. quality seeds. REASONS FOR GROWING UNEMPLOYMENT IN PAKISTAN: Unemployment is one of the biggest problems of Pakistan. However. That person is unemployed who has ability to do work and is willing to do work but is unable to get job opportunity. especially the Gulf countries. With the decline in jobs abroad. rate is further expected to increase in near future because of the current financial crisis in the country. pesticides. With the high rate of population growth. which can be figured out from the low growth rates.
v. gas and oil etc. Due to all these factors agriculture sector is not expanding and there is general and disguised unemployment. government cannot start developmental projects. many industries have been closed. according to the need of different sectors of the economy. They do not know how to run their businesses properly. Public attitude towards education is wrong. On the other side if government takes step to increase indirect taxes. In Pakistan majority of the businessmen are less educated. Tax evasion is common. There is lack of technical and vocational institutions. Millions of people in Pakistan are poor. iii. vii. Ratio of direct taxes is more than indirect taxes. Due to poverty people are overburdened with expenditures and their savings are very low. In Pakistan there is lack of every kind of planning. engineers. There is no educational planning. High cost and low quality are responsible for less demand for our agri and industrial items. Loadshedding of electricity is disturbing economy. So they become bankrupt. In Pakistan education system is defective. they want to get their degrees in general and arts subjects.Unemployment And Inflation agriculture education. It is said that for the reasonable growth of economy saving rate should be at least 25% in any country. resulting in the prevailing unemployment ratio. ultimately there is unemployment. Nobody can set up his own business without technical education. iv. Low investment level is due to less savings. viii. There is absence of such kind of planning to produce doctors. But due to backwardness it is employing a small number of people. This factor generates unemployment on a massive level. especially the industrial sector. then from where public would find jobs. tax system is not satisfactory. Due to less availability and high rates of basic inputs like electricity. This system is producing the stuff. technical experts scientists etc. There is a huge difference between the demand and supply for labor. Because of less demand of such kinds of goods both the domestic and international producers are losing their interest in production. Due to less income from the taxes. Industrial sector is the second largest sector of our economy and contributes 19% to national income. vi. but in Pakistan it is only 13 to 14% which is very low. ii. it would also affect Macro Economics Report Page 23 . That’s why people are becoming unemployed. In Pakistan. This sector should employ a large number of labor. which is useless in technical fields of the country. Due to electricity breakdown already established industry is deteriorating. If there is no investment. ix.
Such loans were not utilised honestly. Pakistan has less funds to invest in job providing projects. Pakistan’s population growth rate is 1. Different sectors of economy are unable to provide jobs to the growing population. terrorism. Concluding. UK and some European countries and is now a global phenomena. Fiscal and monetary policies are also responsible for unemployment. xii. bad law and order situation. World Bank and many other sources. Current external debt of Pakistan is more than 50 billion dollar. xi. Political instability. Due to 9/11 incident. Every annual budget shows deficit. So in the current scenario Pakistan has limited job opportunities in other countries of the world. bomb blasts. This crisis originated from the banking sector of USA. Pakistan investors are taking away their money to Dubai and other countries of the world. industries are also responsible for unemployment. xvi. xiii. better law and order situation. army’s interference. Current international financial crisis is one of the biggest reason of unemployment in Pakistan and in the whole world. abolishing energy crisis. Through the monetary policy if the government increases the rate of interest. Pakistani rulers got loans from IMF. xv. it discourages the investors from getting loans. In view of fiscal policy. Our resources are limited. So there is unemployment. Government has to allocate a big amount for the repayment of loans with interest.8% which is the highest in the region. sincerity with Pakistan and by adopting the Islamic economic system we can not only tackle the issue of unemployment but every economic problem of our country as well. consistent policies of government. Gulf war and the baseless allegations of terrorism the image of Pakistan has been affected very badly at international level. inconsistent economic policies etc are the factors which are disturbing domestic and foreign investment. So due to less resources for developmental projects there is unemployment. x. should make efforts to push economic growth process.Unemployment And Inflation investment and ultimately employment level. Macro Economics Report Page 24 . Craze for work only in government sector. I would like to suggest that with proper economic planning. xiv. Since 1947. instead of private sector and seasonal firms. HOW TO CURB EFFECTS OF UNEMPLOYMENT IN PAKISTAN: 1) Govt.
5) More Technical and Vocational training facilities should be provided. to stimulate production and investment. self-employment scheme should be encouraged in true manners. 2) Govt. Macro Economics Report Page 25 . should seriously try to boost exports through broadening the tax base and lowering tariffs. 3) Govt. In this way unemployed people will get the chance to enhance their skills and become able to earn reasonable income.Unemployment And Inflation For this purpose Economic Revival Package should announce for the revival of industries sector. 4) Beside this a number of fiscal and monetary measures should take to attract industrialists and particularly foreign investment. 6) With a view to reduce educate unemployment. should announce a package for the development of agriculture sector .
This type of inflation is also called as oligopolistic Macro Economics Report Page 26 . This type of inflation may or may not occur in conjunction with demand-pull inflation. Pricing Power Inflation: Pricing power inflation is more often called as administered price inflation. this. Cost-push Inflation: As the name suggests. War produces this type of inflation as demand for war materials and manpower grows rapidly during that time. and. TYPES OF INFLATION: Demand-pull Inflation: Demand-pull inflation is also called as wage or excess demand inflation. This type of inflation occurs when the businesses decide to increase their prices to increase their profit margins.Unemployment And Inflation INFLATION The rate at which the general level of prices for goods and services is rising. along with severe deflation. This is less common than demand-pull inflation. For instance. a rise in the wages of laborers is what raises the unit costs of production and thus raises price. Pricing power inflation does not occur at the time of financial crises and economic depression. subsequently. or when there is a downturn in the economy. when the cost of production of goods and services increases. leading to a situation called as demand-pull inflation. there is likely to be an increase in the prices of finished goods and services. This type of inflation occurs when total demand for goods and services in an economy exceeds the available supply. Central banks attempt to stop severe inflation. purchasing power is falling. in an attempt to keep the excessive growth of prices to a minimum.
Thus. However. Taking price changes for each item Macro Economics Report Page 27 . This would lead to a widespread inflation throughout the economy. this type of inflation is short-lived. an increase in the cost of crude oil would directly affect all the sectors. there would be layoffs and it would adversely affect the work force and the economy in turn Hyperinflation: Hyperinflation is also known as runaway inflation or galloping inflation. For instance. If this situation occurs when there is a recession in the economy. in Germany. In 1923. The sectoral inflation takes place when there is an increase in the prices of the goods and services produced by a certain sector of industries. inflation rate touched approximately 322 percent per month with October being the month of highest inflation. MEASEUREMENT OF 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. This can usually lead to the complete breakdown of a country’s monetary system.Unemployment And Inflation inflation because oligopolies have the power of to set their own prices. food and medical care. the ever-increasing price of fuel has become an important issue related to the economy all over the world. This type of inflation occurs during or soon after a war. Sectoral Inflation: This is the fourth major type of inflation. which are directly related to the oil industry.
manufacturing industries and commodities markets. the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. domestically produced. final goods and services in an economy. the total value of all final goods and services produced within that economy during a specified period. the GDP deflator measures the ratio of nominal (or current-price) GDP to the real (or chain volume) measure of GDP. The formula used to calculate the deflator is: Macro Economics Report Page 28 . Alternately. then multiplied by one hundred. GDP DEFLATOR GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new. PRODUCER PRICE INDEX A Producer Price Index (PPI) measures price change from the perspective of the seller.Unemployment And Inflation in the predetermined basket of goods and averaging them calculate the CPI.e the price of an item at a given year. It measures average changes in prices received by domestic producers for their output. the CPI can be performed as: The "updated cost" (i. Calculating the CPI for a single item Where 1 is usually the comparison year and CPI1 is usually an index of 100. The PPI shows trends within the wholesale markets (the PPI was once called the Wholesale Price Index). GDP stands for gross domestic product. eg: the price of bread in 1982) is divided by the initial year (the price of bread in 1970).
The CPI is the main measure of price changes at the retail level. 26.Unemployment And Inflation Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP. the rate of inflation increased by 7. the main focus is also placed on the CPI as a measure of inflation as it is more representative with a wider coverage of 374 items in 71 markets of 35 cities around the country. It increased by 10.33 per cent and 21. these prices are collected from wholesale markets as well as from mills at organised wholesale market level. namely: the consumer price index (CPI). In 2006-07. It covers the wholesale price of 106 commodities prevailing in 18 major cities of Pakistan. the sensitive price index (SPI) and the GDP deflator. In most countries. Unlike some price indexes. An analysis of data for last three years for the same period indicates that CPI.13 per cent and 6. Food inflation has emerged as the main contributor to inflationary pressures. because it most closely represents the cost of living. In Pakistan. the CPI covers the retail prices of 374 items in 35 major cities and reflects roughly the changes in the cost of living of urban areas. The basket is allowed to change with people's consumption and investment patterns.09 per cent and 13. 14.27 per cent. the wholesale price index (WPI). For instance. The WPI is designed for those items which are mostly consumable in daily life on the primary and secondary level. 11.44 per cent respectively over the corresponding period of 2007-08. if the price of chicken increases relative to the price of beef.92 per cent respectively over the same period of 2005-06. It is based on the prices prevailing in 17 major cities and is computed for the basket of commodities being consumed by the households belonging to all income groups combined as in CPI.35 per cent.89 per cent. the GDP deflator is not based on a fixed basket of goods and services.70 per cent respectively in 2007-08 over the corresponding period of 2006-07. it is claimed that people will likely spend more money on beef as a substitute for chicken. It indicates the cost of purchasing a representative fixed basket of goods and services consumed by private households. the main focus for assessing inflationary trends is placed on the CPI. the reason for that is also recorded. SPI and WPI for the year 2008-09 increased by 22. If the commodity is not available. In Pakistan. including Pakistan. The SPI shows the weekly change of price of 53 selected items of daily use consumed by those households whose monthly income in the base year 2000-01 ranged from Rs3000 to above Rs12000 per month. Macro Economics Report Page 29 . hence deflating the nominal GDP into a real measure. The inflation rates based on CPI. The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. SPI & WPI were higher as compared to last two years. Pakistan publishes four different price indices. Inflation has started veering its ugly head in many parts of the world. The SPI also informs about the actual position of supply: whether the commodity is available in market or not.
pulse and sugar to complement the efforts of the private sector. the government has relaxed its import regime and allowed imports of several essential items so that there is a continuous flow in the supply of those important commodities. The government had to raise electricity prices because of a commitment with the International Monetary Fund (IMF). pulses and cooking oil/ ghee at less than the market prices.89 11. ALL THREE INDICES CPI. the government also increased the scale of operations of the Utility Stores Corporation (USC) which supplies essential commodities such as wheat flour. sugar.Unemployment And Inflation The government is cautious about inflation and thus has taken various steps to release demand pressures on the one hand and enhance supplies of essential commodities on the other. In order to provide relief to the common man. In addition. while to enhance supplies. In June. mainly because of unprecedented increase in the electricity tariff. below the central bank’s projection of 12 percent.” said an analyst. “CPI could have been contained to a single digit figure if the electricity charges had not been raised during the year.13 2007-08 10. Macro Economics Report Page 30 . however. To ease demand pressures.48 percent from over 30 percent in the previous fiscal.44 WPI 6. CPI had gone up by 21 percent.35 26. Food inflation came down to 14.33 21. inflation stood at 12. the State Bank of Pakistan (SBP) has continuously tightened the monetary policy over the last three years and more so in the current fiscal year. according to figures released by the Federal Board of Statistics (FBS).70 2008-09 22.It was.09 13.73 percent in 2009/10.92 PAKISTAN ECONOMY: INFLATION PASSES GOVERNMENT TARGETS Consumer Price Index (CPI) rose by 11. the government increased the imports of items like wheat. surpassing the government’s target of 10 percent.27 14. SPI AND WPI AT A GLANCE Average July–April over same period of previous year (Change of indices in %) Index 2006-07 CPI SPI 7.69 percent. In the last financial year.
after a 17.36 percent and 10. high food prices and the second is the base effect of passing the burden of oil prices. House rent index climbed 9. respectively.48pc in May. and analysts expect it to rise further as the government was expected to slash price subsidies in a budget to be announced later on Wednesday. while fuel and lighting index surged 16. Sensitive Price Index (SPI) and Wholesale Price Index (WPI) increased by 13.27 per cent higher than a year earlier. an analyst at InvesCap. Prices of food and beverages rose 28.20 billion rupees from 407.83 per cent. electricity. “The high cost of power generation will result in rise in electricity tariff. said that the drop in CPI was mainly due to higher base affect.69 per cent in May to stand 19.48 billion rupees.05 per cent and 9. respectively. Official data on Wednesday showed the consumer price index rose 2.32 percent and 12. EFFECTS OF INFLATION: The effect of evenly in the consequence some and Macro Economics Report inflation is not distributed economy. and as a there are hidden costs to benefits to others from this Page 31 . Inflation is at its highest since 1975 when annual average prices rose 26.76 percent. while house rent and fuel and lighting increased by 12.82 percent. Analysts said monthly data started being released in 1991 and therefore it was difficult to make an exact comparison of inflation figures.63 percent. head of research at Invisor Securities Ltd.59 percent.21 per cent year-on-year rise in April.64 percent and the perishable items index 20. Total budget subsidies on fuel oil.50 per cent.Unemployment And Inflation Khurram Schehzad. fertilisers and food items were due to be reduced to 295. Transport and communication expenses were higher by 15. He said that inflation would continue to remain in double digit figures during the current fiscal year because of higher dependence on furnace oil for power generation. “There are two factors driving inflation. Education and health expenses went up by 8.” said Asif Qureshi.36 percent. which will lead to inflationary pressures. PAKISTAN ECONOMY: HIGHEST INFLATION IN 30 YEARS Soaring food and oil prices drove inflation in Pakistan to its highest level in over 30 years in May. respectively.69 percent. but reduction in oil prices also had its impact.” The non-perishable food items index rose 13.
The “real” interest on a loan is the nominal rate minus the inflation rate When the balance between supply and demand spirals out of control. while their borrowers benefit.Unemployment And Inflation decrease in the purchasing power of money. The most immediate effects of inflation are the decreased purchasing power of the rupee and its depreciation. the harder they fall". because they can simply increase their income. there will be a stronger impact on the other side. There is a saying. This can be readily tied to higher unemployment rates.g. Those not on fixed incomes are more able to cope. lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings. (e. Because some of the purchases are high-risk investments. gold. because each unit of money is worth less with the passing of time. especially for those with fixed payments. When extremes arise in the supply/demand structure. imbalances are created.g. the price Macro Economics Report Page 32 . which mean that loans made earlier are repaid later in inflated rupees. Another destabilising effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Finally. with inflation. Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature (e. However. the number of people wanting to purchase goods and services outweighs what is available. For example. Inflation weakens the function of money as storage of value. as spending power decreases each month. goods and commodities. Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The point that is being made is that if inflation is not contained and rises at an unsustainable rate. inflation has no effect on the real value of non-monetary items. Lenders are generally hurt more than borrowers during long inflationary periods. spending is diverted from the normal channels and some structural unemployment may take place. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. real estate). essentially. buyers will change their spending habits as they meet their purchasing thresholds and producers will suffer and be forced to cut output. Increases in payments to workers and pensioners often lag behind inflation. When more people want to spend money on something. "the bigger they are. inflation alters the distribution of income. The progressive loss of the value of money during a period of inflation makes the borrowers to be less willing to use the money as standard differed payments DEMAND-PULL INFLATION: The demand-pull theory suggests that inflation occurs when aggregate demand exceeds aggregate supply. loans and bonds). Depreciation is especially hard on retired people with fixed incomes.
Unemployment And Inflation will increase to account for the greater demand. when some Middle Eastern and North African countries placed an embargo on oil exports to the U. printing more money and buying government assets. which occurs when the rate of a country's income rises faster than economic growth. An expansion of government spending financed by borrowing from the banking system under conditions of full employment is another cause of inflation. when more people put money into the economy. strong investment. Supply rises and the increase in demand will have little or no effect on the general price level at this point. MONETARIST THEORY: The monetarist theory suggests the money supply determines inflation. which can originate from high exports. This scenario is typically associated with a strong economy and low unemployment. Top causes of an increased money supply are banks increasing lending. If Macro Economics Report Page 33 . Aggregate demand could rise because of several reasons. This leads to inflationary pressures in the economy. If the total demand for goods and services continue to escalate. A rise in foreigners' income may lead to an increase in exports of a country. it will potentially result in inflation. An increase in demand can be met initially by utilising unemployed resources if these are available. A cut in personal income tax would increase disposable income and contribute to a rise in consumer expenditure.S. which means prices increase to maintain a desirable profit margin. KEYNESIANS THEORY: According to Keynesian. rise in money supply or government financing its spending by borrowing. inflation can be caused by increase in demand and/or increase in cost. Demand-pull inflation is caused by excess demand. Demand-pull inflation is a situation where aggregate demand persistently exceeds aggregate supply when the economy is near or at full employment. COST-PUSH INFLATION: Cost-push inflation occurs when goods and services become more expensive to produce. A shortage of raw materials also can contribute to cost-push inflation. such as the Federal Reserve. a full employment situation will eventually be reached and no further increases in output are possible. If additional money is pumped into the economy while prices of goods and services remain the same. or central banks. A reduction in the interest rate might encourage an increase in investment as well as lead to greater consumer spending on consumer durables. One example of this was the 1973 oil crisis.
Powerful and militant trade unions who negotiate wage increases in excess of productivity are more likey to succeed in their wage claims the closer the economy is to full employment and the greater the problem of skill shortages. The process continues as prices in the product market and factor market are being pulled upwards. Inflation may occur when there is a depreciation of the home currency. they may even seize the opportunity to increase their profit margins. A depreciation of a country's currency results in increases in the price of imported foodstuff. rising production costs will lead to inflation. A significant increase in the level of indirect taxes(taxes on goods and services) will raise domestic prices independently of the state of demand and could be a causal factor in creating wage-push pressure on the economy.Unemployment And Inflation firms are doing well. It is most likely that during full employment conditions. The oil crisis in 1973-1974 and 1970-80 resulted in many countries experiencing severe cost-push inflation. which increases once again. Workers will demand for higher wages and this will add fuel to aggregate demand. Sometimes. Cost push inflation in inevitable when there is a struggle between workers and firms. This means that according to Keynesian. theey will increase their demand for factors of production. Cost-push inflation is usually regarded as being primarily a wage inflation process because wages usually constitute the greaer part of total costs. When firms are faced with higher wage costs. the less likely such behaviour will lead to a fall in demand for their products. raw materials and capital equiment which then results in a rise in production costs. Both try to maintain their real incomes by bidding up their wages and profits. Workers force firms to Macro Economics Report Page 34 . If the factor market is already facing full employment. the rise in wages will exceed any increase in productivity leading to higher costs. Firms may have to bid up wages to tempt workers away from their existing jobs. input prices will rise. they push up the prices of their products to maintain their profits. The more price inelastic the demand for their goods. Keynesian theory of cost-push inflation attributes the basic cause of inflation to supply side factors. Firms will pass the higher costs to consumers in the form of higher prices. oil and many other basic inputs or even semi-manufactured goods used as component parts in the production process will manifest itself as higher consumer prices. An increase in the price of coal.
and try to improvise methods to keep the inflationary conditions under control. if the primary reason for inflation in a nation is the excessive demand for goods and services. Both the situations are not healthy and sound for the overall growth and development of a country's economy. then the economy policy on the government level should find out the causes of such unnecessary rise and undertake measures to decrease the overall level of collective demand . In practice. CONTROLLING INFLATION: Controlling inflation forms a significant part of the economic activities of a nation. and an excessive fall in the prices may lead to Deflation. To this effect. then the cost of production must be checked.Unemployment And Inflation give inflationary pay increases while firms increase prices so as to raise their profit margins. keeping a strong control over Inflation has turned out to be one of the primary objectives of the governments of different countries across the globe. Alternatively. to handle the inflation-related problems. Infect. Price rises are inevitable. Thus. Mentioned below are some methods. it is not always easy to identify the underlying cause. An initial demand pull inflation may strengthen the power of trade unions which then use this power to drive up costs.Sometimes. Inflation is an economic condition characterized by a general rise in the prices. if it is seen that Cost-Push Inflation is responsible for the rise in the demand for goods and services. Keynes' demand and cost push theories pointed out that the closer the economy is to full employment. which mainly concentrate on the fundamental causes of Inflation in an economy. which have proved to be highly effective in controlling inflation to large extents: Macro Economics Report Page 35 . the greater the inflationary pressure. efficacious economic policies are being formulated. the less the inflationary pressure. an initial cost push inflation may encourage the government to expand aggregate demand to offset rises in unemployment. This process is known as a wage-price spiral. it may not be easy to identify the primary cause of inflation. Once inflation is under way. Demand pull and cost push inflation can occur together. For instance. controlling Inflation is important as unrestrained increase of the prices may culminate in Hyperinflation. The greater the rate of unemployment.
in the following three ways: A rise in the interest rate discourages borrowing from both companies and households. Rise in the interest rates is a very useful tool for restricting monetary inflation. Increase in the real rates of interest decreases the demands for loans. This exerts a direct influence on a handful of planned investmentrelated projects. in terms of increasing unemployment and slackening the economic growths. These are policies which can actually control the rise in demand. by increasing the rates of interest and reducing the supply of real money. There may also be a fall in the commercial investments. EXCHANGE RATE: An escalation in the exchange rate is possible by increasing the rates of interest or buying money through the central band interferences in the foreign exchange markets. for reducing the disposable income. thereby rejecting all further additions into this particular flow of income. due to a rise in the costs of borrowing money. MONETARY POLICY: Monetary policies have a great role to play in controlling Inflation. Escalation in the mortgage costs also decreases the demand generated in the housing markets.Unemployment And Inflation FISCAL POLICY: Fiscal policies are effective in increasing the leakage rates from the circular income flow. When interest rates increase. on an annual basis High direct taxes. An escalation in the interest rates brings about a reduction in collective demands. which turn out to be unprofitable. This leads to a fall in the collective demand An increase in the payment of mortgage interests automatically decreases the real 'effective' disposable income of the house owners. as well as their spending capacities. it simultaneously encourages the saving rate. Following are a few types of fiscal policies commonly employed: Lowering the expenses on governmental level A fall in the borrowing amounts in the government sectors. owing to an escalation in the opportunity cost of expenditure. thereby limiting the growth of broad money. This brings about a reduction in the Demand-Pull Inflation. Mentioned below is a short-term mean by which inflation can be controlled through exchange rates: Macro Economics Report Page 36 .
Generally. if more output is produced at a low per unit cost. The Long term means of controlling the Inflation are as follows: Supply-side reform Policy: According to this policy. an attempt to influence the growth of wage leads to limit the rise in the pay in public sectors. and when we consider the data for unemployment and inflation in Britain over the last fifteen years. as well as initiates cash restrictions for making payments to the employees of public sectors. it can lead to a reduction in the pressures created by the Cost-Push Inflation. the government attempts to convince the commercial firms and its employees to implement self-controls at the time of negotiating wages. If the Government wanted to reduce the unemployment rate. there is a fall in the wage inflation when there is an economic depression. THE PHILLIPS CURVE: The essence of the Phillips Curve is that there is a short-term trade-off between unemployment and inflation. It seemed to suggest a short-run trade-off between unemployment and inflation. there are chances for economy to attain persistent economic growth and development. although this might temporarily increase employment. Om governmental level. leading to a rise in the unemployment rates. Macro Economics Report Page 37 . But the original Phillips Curve has come under sustained attack – in particular from monetarist economists. The Basic Phillips Curve Idea – Economic Trade-Offs In 1958 AW Phillips from whom the Phillips Curve takes its name plotted 95 years of data of UK wage inflation against unemployment. Policy regarding labor market reforms: If an increase in the flexibility of labor market permits the commercial forms to put a check on labor costs. it could also have inflationary implications in labour and the product markets.Unemployment And Inflation Income policies or direct wage controls: Setting restrictions on the growth rate of wages may decrease cost push inflation. without being affected by inflation. As far as the private sector is concerned. Falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise. we will find that the nature of the trade-off has certainly changed for the economy and others as well. The theory behind this was fairly straightforward. it could increase aggregate demand but.
Macro Economics Report Page 38 . a positive output gap) Explaining the Phillips Curve concept using AD-AS and the output gap Let us consider the explanation for the trade-off using AD-AS analysis and the concept of the output gap. some labour shortages may occur where skilled labour is in short supply. This creates a positive output gap and it is this that is thought to cause a rise in inflationary pressure as described above. prices may rise as firms pass on these costs to their customers Other factor markets: Cost-push inflation can also come from rising demand for commodities such as oil. The fall in supply takes the economy back towards potential output but at a higher price level. so does demand for these components and raw materials.this makes the assumption that the productive capacity of an economy in the long run is independent of the price level. When an economy is booming. output and employment. In the next diagram. This puts extra pressure on wages to rise. concrete and glass. We see an outward shift of the AD curve (for example caused by a large rise in consumer spending) which takes the equilibrium level of national output to Y2 beyond potential GDP Yfc. we draw the LRAS curve as vertical .Unemployment And Inflation The 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. Product markets: Rising demand and output puts pressure on scarce resources and can lead to suppliers raising prices to widen profit margins. Excess demand in product markets and factor markets causes a rise in production costs and this leads to an inward shift in short run aggregate supply from SRAS1 to SRAS2. copper and processed manufactured goods such as steel.e. The labour market: As unemployment falls. and since wages are usually a high percentage of total costs. The risk of rising prices is greatest when demand is out-stripping supply-capacity leading to excess demand (i.
there was no trade-off between unemployment and inflation. And they (or the trades unions who represent them) may then incorporate these changing expectations into their pay bargaining. He argued that each short run Phillips Curve was drawn on the assumption of a given expected rate of inflation.Unemployment And Inflation So this might help to explain the Phillips Curve idea. Friedman accepted that the short run Phillips Curve existed – but that in the long run. Friedman introduced the idea of adaptive expectations – if people see and experience higher inflation in their everyday lives. the Phillips Curve was vertical. The Monetarist view is that attempts to boost AD artificially to achieve faster growth and lower unemployment have only a temporary effect on unemployment. then this would cause an upward shift in the short run Phillips Curve. In other words. Macro Economics Report Page 39 . Friedman argued that a government could not permanently drive unemployment down below the NAIRU – the result would be higher inflation which in turn would eventually bring about a return to higher unemployment but with inflationary expectations increased along the way. they come to expect a higher average rate of inflation in future time periods. Friedman argued that in the long run. We could equally use a diagram that uses a non-linear SRAS curve to demonstrate the argument. So if there were an increase in inflation caused for example by a temporary boost to aggregate demand caused by a large monetary expansion and this had the effect of driving inflationary expectations higher. The next diagram shows the original short-run Phillips Curve and the trade-off between unemployment and inflation: The Expectations-Augmented Phillips Curve The original Phillips Curve idea was subjected to fierce criticism from the Monetarist economic school among them the American economist Milton Friedman.
Unemployment And Inflation Wages often follow prices. The expectations-augmented Phillips Curve argues that attempts by the government to reduce unemployment below the natural rate of unemployment by boosting aggregate demand will have little sustained success in the long run. Macro Economics Report Page 40 . A burst of price inflation can trigger higher pay claims. The effect is to create higher inflation and with it an increase in inflationary expectations. rising labour costs and further upward pressure on the market prices of many different goods and services. The result may be that higher unemployment is required to keep inflation at a certain target level. Credible policies to keep on top of inflation can also have the beneficial effect of reducing inflation expectations – causing a downward shift in the short run Phillips Curve. This is illustrated in the next diagram – inflation expectations are higher for SPRC2. The Long Run Phillips Curve Normally drawn as vertical – but the long run curve can shift inwards over time. The Monetarist school believes that inflation is best controlled through tight control of money and credit.
Macro Economics Report Page 41 .Unemployment And Inflation An inward shift in the long run Phillips Curve might be brought about by supply-side improvements to the economy – and in particular a reduction in the natural rate of unemployment. For example labour market reforms might be successful in reducing frictional and structural unemployment – perhaps because of improved incentives to find work or gains in the human capital of the workforce that improves the occupational mobility of labour.
opfblog.html 5.economywatch.org/.economicshelp.infocheese. www.pdf 6.com/unemployment/measurement.com/EBchecked/topic/456596/Phillips-curve 8. http://tutor2u.html Macro Economics Report Page 42 .net/economics/revision-notes/a2-macro-phillips-curve.economywatch./inflation/different-types-of-inflation 2.net/economics/content/topics/. tutor2u.html 3. http://tutor2u. http://www. www.html 7.Unemployment And Inflation BIBILIOGRAPHY 1.britannica. http://www..com/expectationsaugmentedphillipscurve./unemp_policies. www.html 4..com/inflation/causes. http://www..net/economics/revision_focus_2004/A2_The_Phillips_Curve..com/8447/inflation-and-its-impact-on-the-pakistan-economy 9.