Promoting Employment and Minimizing Unemployment in an Islamic Economy
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Transcript of Promoting Employment and Minimizing Unemployment in an Islamic Economy
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Economics of Employment and unemployment
from the Islamic Perspective
IDsB/IRTI
Video-Conferencing DLP
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Introduction• The importance of employment economics cannot be overstated –
employment is the immediate means of livelihood in human societies.
• Unemployment, on the other hand, is the gateway to poverty and social unrest - unless it is aggressively attacked through appropriate policy.
• Nonetheless, employment economics in the Islamic perspective has remained overshadowed by research in Islamic banking and financial economics – why?.
• Admittedly, riba elimination lies at the heart of Islamic economics, whereas Islamic labour contracts are similar to their mainstream counterparts.
• Yet, riba elimination should be viewed as an integral part of an equitable macroeconomic strategy that takes full employment targets and job security as top priorities.
• More research is needed to project riba elimination into practical employment strategies.
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Introduction
• The objective of this lecture is to shed light on salient theoretical features of free market labour economics with relevant Islamic implications.
• Due to time constraint, attention will be focused on the impact of riba elimination on employment although there definitely more about employment from an Islamic perspective.
• Again, we cannot introduce all real and monetary macroeconomic variables that affect the theory of employment.
• Two models will suffice for the current objective:1. Neoclassical equilibrium model of the labour market2. Kenynesian model of labour market disequilibrium.
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Basic definitions
• Adults in the working age are normally classified three broad groups as – Employed (E)– Unemployed (UE)– Not in the labour force (NLF)
• Hence, the Labour Force (LF) consists of E+UE• LF Participation Rate at any point of time is the
percentage of the population of working age who declare themselves to be in the LF
• In practice this may not be an adequate measure of the true situation PR in the labour market.
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Types of UE
• Frictional UE: an irreducible minimum level of UE in a dynamic economy = people in shifting times between jobs.
• Structural UE: caused by changes in the structural long term pattern of demand and production – thereby affecting mismatch of skills and job opportunities.
• Demand-deficient UE: This is the Keynesian UE where actual aggregate demand falls short of the full employment aggregate demand – wages and prices have not yet adjusted to restore full employment.
• Classical UE: where wage rates are held artificially above the full employment equilibrium – trade union power or minimum wage rate legislation.
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Model- INeoclassical Equilibrium model
• The first model measures represents real wage (w) on the vertical axis and number of workers (N) on the horizontal axis.
• Then the following schedules are drawn:• Labour Demand (LD) schedule: firms takes on more
workers at lower wages.• Labour Force (LF) schedule: workers willing to be in the
labour force at each real wage ( upwards sloping).• Workers Accepting Job offers (AJ) : this schedule lies to
the left of LF because some LF members are between jobs and that some optimists hang on for an even better wage rate.
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Model- IFull Employment and the Natural rate of
Unemployment
• Full employment level is the equilibrium level (Nnatural rate of unemployment (ne) is the difference N1- N*
• Thus *) at real wage rate ( w* )where LD intersects with LD.
• The size of LF at this equilibrium is N1.• The, the natural rate of unemployment is the rate
of unemployment when the labour market is in equilibrium.
• This is entirely voluntary- including frictional unemployment and structural unemployment.
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Model- IInvoluntary Unemployment
• Suppose trade unions maintained the real wage rate at w2 well above the full employment wage rate w*.
• This depresses employment level to N2 and unemployment now becomes bigger N2- N1
• Individual workers willing to work at w2 cannot find work – therefore this is involuntary UE.
• Yet, from the viewpoint of workers’ collective action, this is voluntary UE- the classical version of voluntary UE.
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Neo-classical equilibrium model
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Full employment, the natural rate of UE and the interest rate
• Movement along the LD depends on real wage, but the position of the LD depends, among other things, on the rate of interest.
• A rise in the interest rate causes LD to shift backwards towards the origin – reducing N*
• A fall in interest rate causes LD to shift forwards – raising the level of employment
• Hence, in an interest-free economy, more labour force will accept job offers and fewer workers will be ‘naturally’ unemployed.
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Employment and natural UE in an interest-free economy.
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Model-IIKeynesian demand deficient UE
• The Keynesian theory is a disequilibrium model of involuntary unemployment – the economy has not fully adjusted to the new level of aggregate demand.
• The basic model consists of• 45-degree Aggregate Supply curve:
– Aggregate expenditure = aggregate income.• AD = Aggregate Demand function
Private consumption ( C ) + private investment (I0)• Income level ( Y0 ) is below the full employment
income level.
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Model-IIKeynesian Demand-Deficient UE
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Model – II in an interest free economy
• Investment expenditure in inversely related to the interest rate
• Hence, a rise in the interest rate will reduce investment and hence aggregate demand, leading to an even lower level of output.
• Conversely, in an interest-free economy, rise in investment will recover the deficient aggregate demand towards full employment.
• Compare The impact of I1 with that of I0
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Model-II in an interest-free economy
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