Unemployment and Inflation

Economics

Unemployment

• Economist’s definition:

• Those of working age, who are without work, but who are available for work at current wage rates.

Two measures of unemployment.

• Claimant count

• ‘People of working age, who are without work, who are able and willing to work and looking for work for four weeks.

UNEMPLOYED

From Jobs

People made redundant

People sacked

People resigning

People temporarily laid off

From outside the labour force

School/college leavers

People returning to the labour force

To outside the labour force

People who give up looking for a job

Retirement age

Temporarily withdraw from labour force

Emigrate

To Jobs

People taking new jobs

Returning to jobs.

Causes of unemployment

• Cyclical unemployment• Frictional/Search unemployment• Structural Unemployment• Technological Unemployment• Regional Unemployment• Seasonal Unemployment

Costs to the economy

• Unemployment benefits• Loss of tax revenue• Increased crime• Wasting skills• Social problems

Kazakhstan’s Unemployment Rate

Inflation

• The rate at which P for goods and services

• purchasing power

• Inflation is measured by CPI Consumer Prices Index

Inflation Measured by the CPI (Consumer Prices Index)

Inflation 1993 - 2017

Source http://www.tradingeconomics.com/kazakhstan/inflation-cpi

World Inflation Rates

Costs of Inflation

• Menu costs• Redistribution• Uncertainty• Bad for Balance of Payments• Resources

Causes of InflationDemand Pull• Rising AD

Cost Push• Diminishing resources• External Shocks• Wage Push• M prices rising.• Tax Push

Who loses out from Inflation?

• Businesses• People on fixed incomes

Who Benefits from Inflation?

• People in debt

Relationship between Inflation and Unemployment.

• 1958 Phillips showed the statistical relationship between wage inflation and unemployment in the UK between 1861 and 1957

Inflation

Unemployment5%

0

THE PHILLIPS CURVE

The reason the curve is bowed in to the origin is as AD expands, initially there would be plenty of surplus labour, which would meet the extra demand without the need to raise wages very much.

Questions

• In England in the 1970s, the price of oil increased by 4x. England M all our oil from OPEC.

• This D for M, and D for domestically produced goods.

• Therefore what happened to unemployment?• What happened to inflation?• How would this be illustrated on the Philips Curve?

Outward Shifting Phillips Curve

• Oil price shocks

• Expansionary fiscal policy

• High Interest Rates

Inward Shifting Phillips Curve

• More flexible labour force• Use of inflation targets by Monetary Policy

Committee.• Advancements in technology leading to lower

unit costs.• Increased competition from abroad, forcing

firms to keep their costs down.

NAIRU Non-Accelerating Inflation Rate of Unemployment.

• Is the level of unemployment which exists when the AD for labour = AS of labour at the going wage rate.

• There is no upward pressure on the wage rate or inflation.

• NAIRU consists of voluntary, frictional and structural unemployment.

Inflation

Unemployment5%

0

THE LONG RUN PHILLIPS CURVE

0% inflation and 5% unemployment

Then there is a sudden increase in AD

Expectations Augmented Phillips Curve

• When unemployment drops below the NAIRU (non-accelerating inflation rate of unemployment), increasing inflationary expectations shift the Phillips Curve outward.

Expectations Augmented Phillips Curve

• Higher costs and decreasing aggregate demand push unemployment up and inflation down along the new Phillips Curve.

Expectations Augmented Phillips Curve

• There is no permanent inflation-unemployment tradeoff. At the NAIRU unemployment rate (for example), inflation may be low or it may be high, once inflationary expectations adjust.

Kazakhstan’s GDP per Capita