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UNEMPLOYMENT

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DEFINITIONTHE COST OF UNEMPLOYMENT CHARACTERISTICS OF UNEMPLOYMENT

THE CAUSES AND REMEDIES OFUNEMPLOYMENT

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Unemployment refers to people who arewilling and able to work but have not beenable to find employment

Unemployment rate = Number ofunemployed and claiming for benefits *100/ labor force

Problem: those who can not find jobs but

have not registered as unemployed.

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A. The Economic cost: lost output which couldhave been produced had the unemployed beenin employment

B. The Social cost: those who have no jobs for a

long-time may get involved in social problemsof demoralizing

C. The cost to exchequers: unemploymentbenefits increase which place burden on the

government expendituresThose who become unemployed no longer pay

income tax reduce the government income.

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A. Regional unemployment: Unemployment tends to be high in some regions

within a country. EX: Remote areas may havehigher unemployment than cities.

B. Female unemployment In many countries, female unemployment tends

to be higher than the male unemployment in acertain period of time. Some others - not

C. Age-related unemployment

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1. Frictional Unemployment: Those who have left their jobs and are waiting for

working at new companies

Those who have just graduated from schools and

universities Remedies: Reduce the job search time by shortening the

unemployment benefits

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2. Structural unemployment: Those who are unemployed because their

qualifications could not meet the jobrequirements

Remedies:Retraining help them suitable to new skills required

Regional policies: capital subsidies to assisted labor-redundant industries, labor subsidies paid tomanufacturing industries to encourage moreeducation and retraining for their labors,

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3. Demand deficient unemployment Those who become unemployed because the

economy falls into recession period.

RemediesExpansionary Fiscal PolicyExpansionary Monetary policy

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4. Real wage unemployment Those who become unemployed because the

labor real wage was higher the equilibrium levelin the labor market.

Remedies:Require agreement among labor unions, business

owners and the government

Readjust the minimum wage policy if possible.

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Government policies that push the AS curveto the right, which can reduceunemployment in long-run

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- Definition of inflation - The measurement of Inflation: CPI and RPI - The Effects of Inflation

- Theories of Inflation - Counter-Inflationary policies

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Inflation: A continuous increase in the overalllevel of prices during a certain period of time

Deflation: A continuous decrease in the overalllevel of prices during a certain period of time

Disinflation: A decrease in the rate at which pricesare rising

Hyperinflation: Extremely high inflation

Stagflation: A situation of falling output and rising

prices

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We use price index to measure inflation Some kinds of price index: CPI (Consumer

Price Index), RPI ( Retailer Price Index), orDDP Deflator

See example of calculating RPI on page 175

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Perfectly anticipated inflation: Shoe-leather costs: inflation discourage people to

hold money. So they have to go to their banksmany times to withdraw cash increase

opportunity cost of time, transport cost, bankingfees, etc.

Menu cots: inflation cause companies to reprinttheir price quotation lists, change price labelsstick on goods at supermarkets, etc increasetheir costs

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Unexpected Inflation: A. Re-distributional effects:Reduce purchasing power of fixed income people,

pensioners, etc.

Reduce real income (or purchasing power) of thosewhose income could not increase at the same rate asinflation rate.

Tax payers will pay higher proportion of their incometax, hence a redistribution of income from tax payers

to the government (fiscal drag)Inflation is not good for lenders of money.

B. Effect on business:

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Rising costs of production, delayed contracts,rising labor wages, reduced profits, etc,

C. Effect on Balance of Payment (BoP) Higher prices of goods and services less

competitive in the world market reducedexports deteriorate the BoP.

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1. The Monetarist theory of inflation 2. The Quantity theory of money 3. The Cambridge version of the quantity

theory of money 4. The Phillips curve

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Inflation is caused by too much MoneySupply M in the economy

Two views of monetarist theory are: The quantity theory of money

The Expected Augmented Phillips Curve

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M.V = P.T Where:

M: value of Money Supply

V: velocity of circulation

P: price level

T: number of transactions (output)

During stable V and T, an increase in M will causeprice increase inflation

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Money Demand (Md) depends o nationalincome Y, given by:

Md = k.Y Where: k: a certain constantTotal income = total expenditures = P.Q Md = k.P.Q When money market is in equilibrium : Money

demand = Money Supply M Md = M = k.P.Q

K and Q are constant, so any increase in M willcause P to increase or inflation. Compared to the quantity theory of money:

k=1/v

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However, in 1960s, the Phillips curverelationship between inflation andunemployment broke down as economistsaw that both unemployment and inflationrate increased together at that time.

To explain for this phenomenon,monetarists use the Expectation-

Augmented Phillips curve.

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Monetarists claim that in long-run, thenational output reaches the potential level(Yp) and unemployment reduces back toNatural rate (Un).

So any increase in the Aggregate DemandAD will lead to higher inflation but output. the Long-run Phillips curve is vertical, which

means that there is no relation betweeninflation and unemployment in the long-run.

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Developed by Keynes in 1960s.There are two causes of inflation: Demand Pull

reasons and Cost-Push reasons Demand-Pull reasons:

When Aggregate Demand curve shifts to the right, itwill cause inflation

AD = C + I + G + EX IM

Possible reasons of demand pull: Households increase consumptions (C)

Firms increase investment (I )Government increase expenditures (G)

Exports increase

Imports reduce

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Cost-Push reasons:All reasons that cause the AS curve to shift to the

left inflation

All possible reasons:

Input price increase (production materials, labor wages,price of petroleum, etc)

Inefficient Government policies

Tax increases

Weathers, wars, etc.

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Policies to cub inflation: Contraction Fiscal policy

Contraction Monetary policy

Direct intervention by price controls (ceiling

prices) and income policies to freeze wage andprice increase.

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