T OPIC 5 INFLATION AND UNEMPLOYMENT ( BY NAZNI B NOORDIN, FSPPP UITM KEDAH )

L EARNING O BJECTIVES To see the patterns of Malaysia income distribution. To identify the cause of income inequality. To explain unemployment trend, types, causes and strategies. To examine the definition and the types of inflation.

F ISCAL P OLICY IN E CONOMIC G ROWTH Fiscal Policy = aggressively using money as an injection to of millions and billions of ringgit into the economic system of the country to boost grow and stability. Fiscal Policy as a tool of the government to control inflation and recession. Inflation = increase in the prices of goods and services in a country. Recession = a period when economy of a country is not very successful. Fiscal Policy as a strategy to encourage public spending. Fiscal Policy will encourage “multiplier effects” of the economy.

INFLATION

W HAT IS INFLATION ? Inflation = increase in the prices of goods and services in a country. Inflation is measured, as the annual percent change in the prices of goods deemed necessary for life in that country. The specific goods included in this “basket market” change only rarely, so this measures reflects fluctuation in purchasing power of the national currency. To much money running over a few goods.

T YPES OF I NFLATION 1. Demand-pull inflation 2. Cost-push inflation 3. Imported inflation

1. D EMAND - PULL INFLATION Exist during full-employment. Every individual earns higher income that result in higher expenditure made by household. The expenditure made exceed the capacity of the economy to produce goods and services.

1. D EMAND - PULL INFLATION – CONT ’ D Also exist during wartime or under the condition of political instability where government has to increase expenditure by increasing the borrowing activities from central bank because of limited income. This condition will increase supply of money within the economy and the expenditure made will exceed the capacity of economy to produce goods. Thus inflation will exist. Example : price of houses.

2. C OST - PUSH INFLATION This inflation exists during full-employment has been achieved in the economy. Firms facing with higher demand by household in using goods and services within the economy and they have to increase output by increasing the salary/labor wages. This condition will result in high prices of goods because of high labor wages that should be paid by the firms.

3. I MPORTED INFLATION This inflation exists when the country imports goods from one country that facing with inflation. We import the inflation from foreign country where we buy products that having higher prices.

UNEMPLOYMENT

Unemployment is measured annually as the percent of the labor force comprises adults who want to work. Uncounted are those who do not seek employment, or who have become discouraged enough to stop looking for the job.

R EASON FOR UNEMPLOYMENT OR REASON FOR INABILITY TO SECURE JOBS. 1. Lack of technical skills. 2. Economic slowdown. 3. Competition from skilled and cheap migrant worker. 4. Competition from overseas graduate who are more competent. 5. Poor or lack in soft skills.

R EASON FOR UNEMPLOYMENT OR REASON FOR INABILITY TO SECURE JOBS – CONT ’ D 6. Slow growth in job creation - The slow growth of job creation continued throughout the 1 st Malaysia Plan (1MP). During that period ( ), the rate of employment growth for Malaysia averaged only 2.8% annually. One of the main reasons is because of low marginal contribution of the agricultural sector to new job creation.

T YPES OF UNEMPLOYMENT 1. Structural unemployment : decline in some industry within the economy because of there is better product in the market or inability to compete in international market has force many industry to reduce the output produce. 2. Cyclical unemployment (also known as Demand deficient) : economy is not static, it’s moving and dynamic. In one time, the aggregate demand will be much higher than before and force the industry to produce more goods and services. In another time, demand decreased & force the industry to produce less and to reduce the employees.

T YPES OF UNEMPLOYMENT - CONT ’ D 3. Seasonal unemployment : this type of unemployment usually exists in the agricultural sector, where much of the activities will depend on good weather/ season. Most of the activities in the agricultural sector have to be stopped under bad condition. 4. Frictional unemployment : unemployment rate between 2-4%, the country is experiencing the frictional unemployment. It is the natural unemployment problem that exist in a country, where those who are not working not because of there is limited supply of work in the economy but they were trying to find better job with better payment.

T YPES OF UNEMPLOYMENT - CONT ’ D 5. Real Wage Unemployment - Real Wage unemployment occurs when wages are above the equilibrium level causing the supply of labour to be greater than demand. For example, a fall in demand for labour (due to demand side shock) could cause unemployment, if wages are kept at their old level. Classical economists argue the solution is to cut wages to reduce unemployment.

E MPLOYMENT CREATION IN BOTH RURAL AND URBAN AREA Rural areas - For the rural areas government had planned to expand employment opportunities through new land development schemes, establishment of new growth centers and the absorption of excess labor in other sectors of the economy. Urban areas -The strategy focused on expanding job opportunities in manufacturing and construction, including the promotion of small-scale industries.

M ALAYSIA EFFORTS AT C OMBATING U NEMPLOYMENT 1. Generating jobs/ jobs creation through economic growth. 2. Equipping new labor market entrants with the right knowledge and skills. 3. Improving job matching. 4. Widening the access to training and re-training. 5. A culture of life-long learning.

S TEPS TO REDUCE UNEMPLOYMENT AMONG GRADUATES IN M ALAYSIA 1. GTS (Graduate Training Scheme) – provides more opportunity for young & fresh graduate to further their study and skills. 2. Government taking more graduates into public sector. 3. Government provide incentives to young graduates like capital to start small business etc.

S TEPS TO REDUCE UNEMPLOYMENT AMONG GRADUATES IN M ALAYSIA - CONT ’ D 4. Government’s role in attracting more foreign companies to invest and open companies in Malaysia. 5. Reduce taking foreign workers especially among graduates or skilled workers. Government should train local graduates to take up those offers.

R OLES OF GOVERNMENT UNDER FISCAL AND MONETARY POLICY IN TACKLING HIGH INFLATION & UNEMPLOYMENT RATE. Fiscal Policy – refers to the rate of taxation & level of government spending, government’s management of the economy by varying the size & the type of taxation, public debt and government expenditure & government funds. It is the deliberate adjustment of government revenue & expenditure for the purpose of obtaining greater economic stability.

O BJECTIVE OF FISCAL POLICY 1. To manage the economy efficiently. 2. To achieve high economic growth. 3. To raise the general level of real income & aggregate demand. 4. To redistribute income & resources efficiently.

O BJECTIVE OF FISCAL POLICY – CONT ’ D During high inflation - government will increase tax rate & reduce government expenditure to increase private consumption & reduce supply money in the economy. During high unemployment – government will reduce tax rate & increase government expenditure to increase money supply in the economy & high standard of living.

M ONETARY POLICY Affects the supply of money and the rate of interest. Government use monetary & fiscal policy to achieve goals for output & employment growth & price stability. During inflation, government increased interest rate, decreased expenditures & wage-price control to reduce spending. During high unemployment, government reduces interest rate, expand bank credit, decrease tax rates & increase government spending.

I MPLICATIONS OF RECESSION TO M ALAYSIAN ECONOMY 1. Export earning – decrease. 2. Current account and BOP (Balance of Payment). 3. Economic growth - slowdown 4. Retrenchment & Unemployment - high 5. Poverty – increase. 6. Drop in Investment – FDI & local 7. Slowdown in industrial activities 8. Decrease in domestic spending 9. Drop in real wages (private sectors) 10. Best talents/ workers go abroad in search for better wages or job opportunities.

T UTORIAL 1. Assess the current GDP in relations to the unemployment and inflation rate in Malaysia. Also, kindly touch on the effort made by the government to overcome those problem. 2. Is there any relationship between inflation and unemployment? Explain.

E ND OF TOPIC 5 If you want something you've never had before, You've got to do something you've never done before.