1 البطالة و التضخم Unemployment and Inflation الجزء الخامس د. إقبال الرحماني 2001

2 Unemployment Boom Recovery Depression Recession Real GDP growth Time Recall that unemployment is an economic and social phenomenon that occurs and increases mainly during periods of recessions and depressions of the business cycle. Q: What causes the fluctuations in the business cycle?

3 Types of unemployment: 1- Seasonal unemployment: A product of regular and recurring changes in hiring of certain fields on a seasonal basis. ( بطالة موسمية ) 2- Frictional unemployment: A product of the short- term movement of workers between jobs & of first time job seekers. ( بطالة إحتكاكية )

4 3-Structural unemployment: A product of technological changes and other changes in the structure of the economy. ( بطالة هيكلية ) 4- Cyclical unemployment: A product of the down side of the business cycle. ( بطالة دورية ) Q-1: What is disguised unemployment, behavioral unemployment, and imported unemployment? Q-2: What are the main types of unemployment exit in the Kuwait?

5 Note: Full-employment in economics does not mean zero unemployment. That is why some economist use the term Natural rate of unemployment. Natural rate of unemployment: the unemployment rate that would exist when cyclical unemployment = zero Note: Frictional unemployment is short term; while structural unemployment can be long term. Q: Who is more likely be unemployed among the different educational levels, age groups, sex and race?

6 Q: What are the costs of unemployment? 1- lower standards of living and status (social unrest). 2- Lower GDP. GDP Gap = Potential GDP - Actual GDP Okun’s Law: For each 1% which the actual unemployment exceeds the natural rate of unemployment, a GDP gap of 2% occurs. Q: What is the effect of increasing unemployment on the government budget ?

7 Lines of unemployed Americans waiting to receive subsidies (unemployment benefit) during the time of the Great depression.

8 Unemployment rate = number of unemployed X 100 number of the labor force Measure of Unemployment: Q-1: Who are the unemployed ? A: those who are actively seeking work and can not find any job at the average wage. Note : unemployment rate does not include discouraged workers.

9 Note: Total population : Population under age 16 House care takers + students + retired + disabled EmployedUnemployed Q-2: What is meant by the labor force ( قوة العمل )? A: The labor force includes those who are working and those who are unemployed and seeking employment Labor force Total population Outside the Labor force

10 Example: according to 1998 statistics of Kuwait, calculate the unemployment rate Outside the labor force Employed + unemployed Unemployed 2209 Unemployment rate = 2209 X 100 = 1.1% then

11 ملاحظة : معدل البطالة في الكويت مازال يعد منخفضا ولكن المشكلة الأساسية تتعلق بإختلالات في قوة العمل وسوق العمل وفي التركيبة السكانية. المجتمع السكاني الكويتى فتي Young Population ) السكان < 15 سنة يمثلون حوالي 42 % من مجمل السكان ). بالإضافة الى ارتفاع معدل الخصوبة Fertility rate مما يؤدي الى ارتفاع معدل الإعالة Dependency Ratio. Note: Dependency ratio = population 60(5) Population at age (5)

12 اختلال سوق العمل في الكويت نسبة الكويتيين الى اجمالى قوة العمل قوة العمل الكويتية قوة العمل الوافدة 81.15

13 خدمات إنتاجية 5.62 تجارة 1.30 خدمات اجتماعية وشخصية أنشطة سلعية 7.67 حسب النشاط الاقتصادى اختلال سوق العمل ( قوة العمل الكويتية )

14 اختلال سوق العمل ( قوة العمل الكويتية ) حسب قطاع العمل خاص ومشترك 6.80 حكومي 93.20

15 التوزيع المهنى اختلال سوق العمل ( قوة العمل الكويتية ) علمية وفنية 8.44 مدرسون مديرون ومشرفون أخرى كتبة 33.08

% 33.7% 38.4% 5% ملاحظة : نسبة حملة المؤهلات العليا من الذكور = 15.2 % من مجمل الذكور بقوة العمل ، و الإناث 36.9 % من مجمل الإناث

17 Inflation Recall that keeping a stable general price level is one of the main macroeconomic goals. Inflation is a sustained rise in the average level of prices (general price level). The price level is the average level of all prices in the economy. Note: inflation is generally classified into two types: Hyper inflation & creeping inflation

18 Measure of inflation : Recall that the price index(PI) is a measure of changes in the average price level. Q|: How is the price index measured ? PI for a certain year - PI for a comparative year X 100 PI for a comparative year Inflation rate =

19 Year Price index Example : Calculate inflation rate between ( ) and ( ) 1) Inflation rate ( ) = ( ) X 100 = 20 % 100 2) Inflation rate ( ) = ( ) X 100 = 2.5 % 120

20 Real historical example, Germany : Year Price index ,320,000,000,000

21 Effects of inflation: 1- Impact on income: if nominal income does not increase, it means a lower purchasing power. Hence, real income will be lower. 2- Impact on income distribution: redistribution of income from fixed income groups to unfixed income groups. Note 2: purchasing power = real value of one unit of money ( $1) = ( $1 / price index) X 100 Note 1: Recall, Real income = (nominal income / PI) X 100

22 Effects of inflation: 3- Impact on creditors & debtors: if inflation rate is higher than nominal interest rate; then there will be a redistribution of income from creditors to debtors. 4- Impact on balance of trade: if inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade. Note : Real interest rate = nominal interest rate - inflation rate

23 Types of inflation: (according to the source of inflationary pressure) 1- Demand-pull inflation: inflation caused by increasing aggregate demand for output. “Too many dollars chasing too few goods”. More likely to occur when the economy is operating near its potential output.

24 Q P AS(SR) AD Y e Y f AS (LR) Recall! When the economy is operating near full employment, any increase in AD will lead only to an increase in prices. p1 p2 p3 AD 2 AD 3

25 Types of inflation: 2- Cost-push inflation: inflation caused by rising costs of production. “profit -push” vs. “wages- push”!. Could occur at different levels of output. Q-1: What is meant by imported inflation? Q-2: What is meant by stagflation?

26 Phillips Curve In 1958, A.W. Phillips, a New Zealand economist, found that there is an inverse relationship between the unemployment rate and the rate of change in wages in England during the period 1826 to Later early studies confirmed an inverse relationship between unemployment and inflation rate. This relation became known as Phillips Curve. Unemployment rate Inflation rate (wage rate) F1 F2 U2U1

27 Q: Is there a trade off between unemployment and inflation rate? Unemployment rate Inflation rate Most economists believe that the inverse relationship between inflation and unemployment rate is just a short-term phenomena. LR Phillips Curve SR1 SR2 SR3