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TWO MAJOR ECONOMIC PROBLEMS : Unemployment and Inflation
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LABOUR AND THE LABOUR MARKET
DETERMINANTS OF DEMAND FOR LABOURWage RateProductivity of LabourPrice of OutputSubstitutability of
Labour with other factors of production
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
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
Wage Rate Determination In the Labour MarketDemandSupplyEquilibrium Wage RateDisequilibrium Wage Rate
Equilibrium Wage RatesIs the wage rate at which the quantity of
labour demanded equals the quantity of labour supplied
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
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
Two major economic problems:
1. UNEMPLOYMENT2. INFLATION
Looking for a job is harder than the job itself
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
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
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
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
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
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
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
InflationA general increase in the price of goods and services in an entire economy over time.
TYPES OF INFLATION
1. DEMAND PULL INFLATION2. COST PUSH INFLATION3. STRUCTURAL INFLATION
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
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
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.
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)
ECONOMIC POLICY TOOLSMonetary Policy Fiscal PolicyTrade Policy
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
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
TRADE POLICY TOOLSPromote Export
Low Ms; Inc
Ms
IMPORT TOLERAN
CEHigh Ms;
Dec. Ms