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LABOUR AND THE LABOUR MARKET

LABOR MARKET, UNEMPLOYMENT, INFLATION

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TWO MAJOR ECONOMIC PROBLEMS : Unemployment and Inflation

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Page 1: LABOR MARKET, UNEMPLOYMENT, INFLATION

LABOUR AND THE LABOUR MARKET

Page 2: LABOR MARKET, UNEMPLOYMENT, INFLATION
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DETERMINANTS OF DEMAND FOR LABOURWage RateProductivity of LabourPrice of OutputSubstitutability of

Labour with other factors of production

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DETERMINANTS OF SUPPLY FOR LABOUR

The Number of birthsThe number of deathsThe number of people

migrating in and out of the area

The number of people who choose to stay at home and look after for their families

The Number of people at school

The number of people in further education

The number of people who are retired

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Production FunctionQ = f (K, L) Demand for Labour : Derived

DemandThe substitution Effect of

Labour : if the wage rate falls, employers will employ more labour because it is cheaper

The Income Effect of Labour: if the wage rate falls, employers will employ more labour because it leaves more budget to spend

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Wage Rate Determination In the Labour MarketDemandSupplyEquilibrium Wage RateDisequilibrium Wage Rate

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Equilibrium Wage RatesIs the wage rate at which the quantity of

labour demanded equals the quantity of labour supplied

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Disequilibrium Wage RateThe market wage is greater than the equilibrium wage

The market wage is lesser than the equilibrium wage

Reasons ( excess supply of labour, workers will be unemployed because of the excess number of workers thus wage rate will fall)

Workers realizing they are or may become unemployed, will accept lower wage rates, in an effort to make their services more attractive to employers

Employers, realizing there are unemployed workers, will offer to employ workers at a lower wage rate

Reasons ( excess supply of labour, workers will be highly sought after, because there is shortage of workers)

1. Employers finding themselves unable to employ as many workers as they would like, will offer to employ workers at higher wage rates in an attempt to attract more workers

2. Workers, realizing they are being sought after by employees, will begin to ask for higher wage rates for their services

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The market wage is lesser than the equilibrium wage

Only when the market wage rate equals to the equilibrium wage rate is there neither excess demand for labour nor excess supply of labour. Hence there are neither unemployed workers or shortage of workers

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Two major economic problems:

1. UNEMPLOYMENT2. INFLATION

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Looking for a job is harder than the job itself

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LABOR FORCE and UNEMPLOYMENT

Labour Force- Population 15 years old and over who contributes to the production of goods and services in the country

Includes either employed or unemployed; and those who are neither employed or unemployed

Participation Rate- The percentage of the entire labour force population that makes up the labour force

Participation rate = Labour Force

x 100 Labour Force Population

Ex. In 1993 labour force was 13.946

million and the labour force population was 21.392 million 65.2% = 13 946 000 x 100

21 392 000

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The Official Unemployment Rate- The number of unemployed people in the labour force as a percentage of the entire labour force

 Ex. The 1993 Labour force of

13.946 people was composed of 12.383 million people who were employed and 1.562 million people who were not.

Unemployment Rate = UELFR/Labour Force x 100

11.2%= 1 562 000 x 100 13 946 000

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Drawbacks

Because of how the unemployment rate is calculated, it may underestimate or overstate the true level of unemployment in the economy. Critics point to the factors: underemployment, discouraged workers, and dishonesty.

Underemployment- The problem of workers being underutilized, either as part-time workers or by working at jobs not appropriate to their skills or education. It is sometimes argued that the official rate understates unemployment by ignoring the underplayed workers.

Discouraged Workers- -Unemployment statistics do not take into account unemployed people

who have given up looking for work.  Dishonesty- Some people responding to Labour Statistics market

survey may state that they are actively looking for work, when they really are not. This makes it possible for the official rate to overstate employment

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UNEMPLOYMENT :ISSUES, DIMENSIONS, AND ANALYSES

UNEMPLOYMENTAn involuntary

idleness on the part of those who have failed to find employment or who have lost their latest jobs, but are able to work, and are looking for work

Types of Unemployment   1. Normal Unemployment- Unemployment

due to low or no demand for workers. 2. Frictional Unemployment- Unemployment

due to being temporarily between jobs or looking for a first job. It is a permanent feature of labour markets, represents about 3% of the labour force at all times.

3. Structural Unemployment- Unemployment due to a mismatch between people and jobs. This type of unemployment occurs because of gradual changes in the economy. Long term adjustments in what, how, and where products are produced cause such unemployment.

4. Technological Unemployment- Unemployment due to technology

5. Cyclical Unemployment- Unemployment due to the ups and downs of economies and businesses, causing unemployment to rise and fall.

6. Seasonal Unemployment- Unemployment due to the seasonal nature of some occupations and industries

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Effects of Unemployment

It creates depression and psychological effect on the part of the male worker

Loss of wages and temporary or permanently lowered plane of living

Women and children enter into the labor force in the desire to help the family

In many instances it breeds discontent, radicalism and general unrest of the existing economic order

Unemployment creates unemployment

It creates more social problems

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Full Employment It is the highest reasonable expectation of employment for the

economy as a whole, as is defined in terms of the Natural Employment Rate

 Natural Employment Rate- which is the unemployment rate

that defines full employment. Includes frictional unemployment, but traditionally excludes cyclical and seasonal unemployment.

Increases over the past few decades in both the actual and the natural unemployment rates represent worrisome trends, which can be explained by the following factors:

1. Structural Change2. Changing Participation Rates3. Minimum Wage

Page 18: LABOR MARKET, UNEMPLOYMENT, INFLATION

Five Forms of Labor Underutilization

Open Unemployment - both voluntary & involuntaryUnderemployment – people working less than they

would like to workVisibly Active but underutilized-people who would

not normally be classified as either employed or underemployedDisguised underemploymentHidden unemploymentPremature retirement

The impaired- people who may work full time but whose intensity of effort is impaired by malnutrition

The unproductive

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InflationA general increase in the price of goods and services in an entire economy over time.

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TYPES OF INFLATION

1. DEMAND PULL INFLATION2. COST PUSH INFLATION3. STRUCTURAL INFLATION

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formula for INFLATION RATE

Yearly = [ cpi current year/cpi previous year-1]100

Monthly=[ cpi current mo/cpi previous mo-1]100

Quarterly= [ cpi qtr of current yr /cpi previous of same qtr of previous yr-1]100

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EFFECTS OF INFLATION

1. It will result to hoarding or illegal storing of product

2. It will aggravate poverty conditions3. Investment is very risky4. Lenders of Money or creditors lose

during inflation while debtors benefit from it because of the decrease in the purchasing power of peso

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Inflation’s Effect.If household ↑ but Inflation ↑ at a higher rate, then household’s

purchasing power ↓.If household ↑ and inflation rate ↑ proportionally, then

household maintains purchasing power.Cost – of – living adjustment clauses (COLA) Provisions for

income adjustment to accommodate changes in price level, which are included in wage contracts.

Fully Indexed Incomes Nominal incomes that automatically increases by the rate of inflation.

Partially Indexed Incomes Nominal incomes that increases by less than the rate if inflation.

Fixed Incomes Nominal incomes that remain fixed at some dollar amount regardless of the rate of inflation.

Nominal Interest rate: The interest rate expressed in money terms.

Real interest rate: The nominal interest rate minus the rate if inflation.

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 INFLATION RATES

       (2000 = 100)

  1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

  Average 6.7 7.5 5.6 9.3 5.9 4 6.8 3 3.5 6 7.6 6.2 2.8 9.3 3.2 3.8 4.4

                                   

January 5.8 8.5 5.6 6.5 10.5 2.2 7.5 3.7 2.8 4.1 8.4 6.7 3.9 4.9 7.1 4.3 3.6

February 5 8.7 5.3 7.6 9 2.5 7.4 3.2 3.2 4 8.5 7.6 2.6 5.4 7.3 4.2 4.3

March 5.6 8.7 5.4 8.1 7.7 2.8 7.6 3.5 3 4.2 8.5 7.6 2.2 6.4 6.4 4.4 4.3

April 5.6 8.9 5.1 8.3 7.1 3.3 7.4 3.5 3.3 4.3 8.5 7.1 2.3 8.3 4.8 4.5 4.3

May 6.3 8 5 9.7 5.8 3.4 7.4 3.5 3.4 4.5 8.5 6.9 2.4 9.5 3.3 4.3 4.5

June 6.6 8 5.6 10 4.9 3.8 7.2 2.9 3.9 5.4 7.6 6.7 2.3 11.4 1.5 4 4.6

July 6.4 7.8 5.4 10.1 4.8 4.2 7.4 2.6 3.7 6.6 7.1 6.4 2.6 12.3 0.2 3.9 4.6

August 6.8 7.3 5.3 9.9 4.7 4.4 7 3 3.4 6.8 7.2 6.3 2.4 12.4 0.1 4.1 4.3

September 8.8 5.3 5.8 9.9 4.9 4.2 6.8 2.7 3.6 7.2 7 5.7 2.7 11.8 0.6 3.5 4.6

October 8.8 5.4 5.9 9.8 5 4.6 6.1 2.6 3.6 7.7 7 5.4 2.7 11.2 1.6 2.8 5.3

November 8.1 6.5 6.4 10.7 3.6 5.7 5 2.4 3.9 8.2 7.1 4.6 3.2 9.9 2.8 3.1 4.7

December 8.1 6.9 6.2 10 3.9 6.5 4.5 2.5 3.9 8.6 6.7 4.3 3.9 8 4.3 3.1 4

Note: Monthly inflation rates when averaged do not tally with the annual inflation rates computed from the Consumer Price Index in the Philippines.  

          Starting January 2012, National Statistics Office (NSO) will no longer issue the 2000 based Consumer Price Index and Inflation Rates.  

Source:  National Statistics Office (NSO)

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ECONOMIC POLICY TOOLSMonetary Policy Fiscal PolicyTrade Policy

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MONETARY POLICY TOOLSReserve

Ratio (RR)Rediscounti

ng Rate (ReR)Open

Market Operation

• Low Ms; Inc Ms= Dec. RR

• High Ms; Dec. Ms=Inc RR

• Low Ms; Inc Ms= Dec. ReR

• High Ms; Dec. Ms=Inc ReR

• Low Ms; Inc Ms= Sell bond

• High Ms; Dec. Ms=Buy bond

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FISCAL POLICY TOOLS

Borrowings

Spending

• International Financial Institution

• Other Countries• Local• Low Ms; Inc

Ms= Inc. Borrowings

• Infrastructure Porjects

• Low Ms; Inc Ms= Inc. Spendings

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TRADE POLICY TOOLSPromote Export

Low Ms; Inc

Ms

IMPORT TOLERAN

CEHigh Ms;

Dec. Ms