Inflation and Unemployment

Meaning of inflation

• Inflation is a sustained increase in the general price level of goods

and services in an economy over a period of time.
• When the general price level rises, each unit of currency buys
fewer goods and services; consequently, inflation reflects a
reduction in the purchasing power per unit of money – a loss
of real value in the medium of exchange and unit of account
within the economy.

• The rate of inflation is the percentage change in the price level:

 Types of Inflation
1. Creeping Inflation: Creeping or mild inflation is when prices rise 3
percent a year or less. This kind of mild inflation makes consumers expect
that prices will keep going up. That boosts demand.

2.Walking Inflation: This type of strong, inflation is between 3- 10 percent

a year It is harmful to the economy because it heats up economic
growth too fast. People start to buy more than they need, just to
avoid tomorrow's much higher prices .

3. Galloping Inflation: When inflation rises to 10 percent or more, it

wreaks absolute havoc on the economy. Money loses value so fast that
business and employee income can't keep up with costs and prices.

4. Hyperinflation: Hyperinflation is when prices skyrocket more than 50

percent a month. It is very rare. In fact, most examples of hyperinflation
have occurred only when governments printed money to pay for wars.
Examples of hyperinflation include Germany in the 1920s.
 Causes of Inflation
1. Demand-Pull Inflation: Demand-pull inflation results from strong
consumer demand. Many individuals purchasing the same good will
cause the price to increase, and when such an event happens to a whole
economy for all types of goods, it is called demand-pull inflation. When
the aggregate demand in an economy strongly outweighs the aggregate
supply, prices go up. Economists describe demand-pull inflation as a
result of too many dollars chasing too few goods.

2. Cost-Push Inflation: Cost-push inflation is a situation in which the

overall price levels go up (inflation) due to increases in the cost of
wages and raw materials. Cost-push inflation develops because the
higher costs of production factors decreases in aggregate supply (the
amount of total production) in the economy. Since there are fewer goods
being produced (supply weakens) and demand for these goods remains
consistent, the prices of finished goods increase (inflation).
 Effects of Inflation
• Income redistribution: One risk of higher inflation is that it has
a regressive effect on lower-income families and older people in
society. This happen when prices for food and domestic utilities
such as water and heating rises at a rapid rate
• Risks of wage inflation: High inflation can lead to an increase in
pay claims as people look to protect their real incomes. This can
lead to a rise in unit labour costs and lower profits for businesses
• Business uncertainty: High and volatile inflation is not good for
business confidence partly because they cannot be sure of what
their costs and prices are likely to be. This uncertainty might lead
to a lower level of capital investment spending
• Falling real incomes: With millions of people facing a cut in their
wages or at best a pay freeze, rising inflation leads to a fall in real
incomes.
 Inflation Control Measures
• Monetary policy: One of the important monetary measures is monetary
policy. The central bank of the country adopts a number of methods to
control the quantity and quality of credit. For this purpose, it raises the
bank rates, sells securities in the open market, raises the reserve
ratio, and adopts a number of selective credit control measures, such
as raising margin requirements and regulating consumer credit. one of
the monetary measures is to demonetise currency of higher
denominations. Such a measures is usually adopted when there is
abundance of black money in the country.
• Fiscal Measures: Monetary policy alone is incapable of controlling
inflation. It should, therefore, be supplemented by fiscal measures.
Fiscal measures are highly effective for controlling government
expenditure, personal consumption expenditure, and private and public
investment.
• a) Reduction in Unnecessary Expenditure
• (b) Increase in Taxes
• (c) Increase in Savings
 Unemployment

• Unemployed: Persons are classified as unemployed if

they do not have a job, have actively looked for work in
the prior 4 weeks, and are currently available for work.

• Unemployment rate: the proportion of the labor force that is

unemployed:

Number of unemployed people

Unemployment rate = Labor force
 The Labor Force

• Labor force: all persons age 15 and over who are either employed
or actively seeking work.
– Out of the labor force: those not working and not actively
seeking employment.

Out of the
labor force
Total
population Employed
Labor force

Unemployed
 Exercise

Number of unemployed people

Unemployment rate = Labor force

• Calculate the unemployment rate.

– #in labor force = 200,000
– #unemployed = 10,000
– Unemployment rate = (10,000/200,000) x 100
= 5%
 Reasons for Unemployment

1. Job leavers.
– They quit to seek other opportunities.
2. Job losers.
– They are laid off or fired.
3. New entrants.
– First-time job seekers.
4. Reentrants.
– They had left the labor force but have returned.

Unemployed persons = Job losers + Job leavers + Reentrants + New entrants

 Categories of Unemployment

• There are four categories of unemployment.

1. Seasonal unemployment.
2. Fictional unemployment.
3. Structural unemployment.
4. Cyclical unemployment.
 Categories of Unemployment (Cont.…..)

1. Seasonal unemployment: unemployment due to seasonal

changes in employment.
2. Frictional unemployment: brief periods of unemployment
experienced by people moving between jobs or into the labor
market.
3. Structural unemployment: unemployment caused by a mismatch
between the skills (or location) of job seekers and the
requirements (or location) of available jobs.
4. Cyclical unemployment: unemployment caused by a decline in
economic activity.
 Defining Full Employment

• Economists think that we are near full employment when

rising prices signal that we are nearing production capacity –
that is, the PPC.

• Full employment: the lowest unemployment rate compatible

with price stability; zero cyclical unemployment.
 Causes of Unemployment
• 1. RECESSION:
i. Companies moving abroad.
ii. Downsizing.
• 2. REDUCED DEMAND FOR GOODS AND SERVICES
i. Cheaper imported products.
ii. Fall off in demand for dometic goods.
iii. Closure of indigenous firms.
• 3. LOW WAGES
i. Little incentive for long term unemployed to return to work.
ii. Loss of benefits e.g. a drop in income.
• 4. AUTOMATION AND NEW TECHNOLOGIES
i. Fewer workers needed to run more technologically advanced companies.
ii. Technical difficulty adapting to changing requirements of industry.
iii. Unskilled workers made redundant
• 5. SEASONAL VARIATION
i. Some employment is seasonal.
ii. Agriculture, tourism and construction.
iii. Off-season workers are laid off.
iv. Students return to full-time education.
 EFFECTS OF UNEMPLOYMENT ON THE INDIVIDUAL
• 1. Loss of Income
i. Financial insecurity.
ii. Stress / Worry about bills.
iii. Fear of poverty.
• 2.Loss of Status
i. Erodes self-esteem.
ii. Decline in self-confidence.
• 3. Loss of Social Contact
i. Social isolation.
ii. Social life and leisure restricted by limited finance.
• 4. Sense of Guilt
i. Failed themselves.
ii. Let down their family.
• 5. Health Problems
i. Depression
ii. Anxiety
iii. Stress
iv. Alcohol abuse
 EFFECTS OF UNEMPLOYMENT ON THE FAMILY
• 1. Decline in Living Standards
i. Repossession of car.
ii. No foreign holidays / leisure activities.
iii. Loss of family home.
• 2. Poverty
i. Common among unemployed families.
ii. Affects nutrition, schooling leading to educational disadvantage.
iii. Insecurity
• 3. Strained Relationships
i. Tension
ii. Possibly violence in the home.
iii. Marital breakdown.
• 4. Children may Suffer Emotionally and Psychologically
i. Strain on relationships between parents and children.
ii. Bored breadwinner creating tension.
iii. Worry about the future can result in ill health.
• 5. Can Shape Children’s Views of Employment/Unemployment
i. Parents are role models for children.
ii. Children of long term unemployed may fall into poverty trap.
 EFFECTS OF UNEMPLOYMENT ON SOCIETY
• 1. Increase in Anti-Social Behaviour
i. Boredom can lead to drug or alcohol abuse, vandalism, and crime.
ii. Areas develop bad reputations and become unemployment black spots.
• 2. Cost to the State
i. Unemployed people are financially dependent on social welfare for their
income.
ii. Loss of income tax for the government.
• 3. Decline in Population in Rural Areas
i. People forced to leave an area in search of employment.
ii. This has a negative impact on other business and services leading to further
unemployment.
• 4. Children of Unemployed Parents are More Likely to be Unemployed
Themselves
i. Where long-term unemployment is accepted as the norm children lack a
positive work ethic and a pattern of unemployment develops over
generations.
• 5. Increased Growth of the “Black Economy”
i. Loss of tax revenue for the government as unemployed people receive cash
for work done while unemployed.