Unit-5

Dr. Mohamed RiyazhKhan – DoMSSNSCE

Unemployment & its impact

Unemployment occurs when a person who is actively searching for employment is unable to find work.

Unemployment is often used as a measure of the health of the economy.

The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force.

Unemployment According to Pigou, “A man is unemployed only when he is

both without a job or not employed and also desires to be employed”.

Unemployment is a major problem of a developing country like India.

Causes of Unemployment

1. Population Explosion 2. Inefficient Agriculture and industrial sectors 3. In appropriate Education system 4. Technology Advancement (Modernization) 5. Weakness in Five- year Planning 6. Less Saving and Investment 7. Inadequate irrigation facilities

Types

Frictional: Frictional unemployment is a temporary condition. This unemployment occurs when an individual is out of his current job and looking for another job.

Structural: This type of unemployment occurs when there is a mismatch of skilled workers in the labour market.

Cyclical: Cyclic unemployment when there is a recession.

Seasonal: occupations such as agriculture, the catering trade in holiday

resorts, some agro-based industrial activities, like sugar mills and rice mills, etc.

Disguised: The term “disguised unemployment” commonly refers to a

situation of employment with surplus manpower, in which some workers have zero marginal productivity so that their removal will not affect the volume of total output. 

Government Policies

1. Prime Minister’s Rozgar Yojana 2. Rural Landless Employment Guarantee Programme

(RLEGP) 3. Integrated Rural Development Programme (IRDP) 4. Jawahar Rogar Yojana 5. Employment Assurance Scheme (EAS)

6. MGNREGA ( Mahatma Gandhi National rural employment guarantee act)

Is designed to provide job guarantee for at least 100 days in rural parts of the country.

Inflation

According to Crowther, “ Inflation is a state in which the value of money is falling, i.e., prices are rising.

According to COULBURN, defined inflation that “TOO MUCH MONEY CHASING TOO FEW GOODS”

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services.

Meaning

Inflation is commonly understood as a situation of substantial and rapid general increase in the level of prices and consequent deterioration in the value of money over a period of time. Inflation is statistically measured in terms of percentage increase in the price index.

Causes of Inflation

1. Over expansion of Money Supply 2. Expansion of Bank Credit 3. Deficit Financing 4. High Non-Development Expenditure 5. Huge Plan Investment 6. Black Money

Types

1. Creeping (Keynes) 2. Walking 3. Running 4. Hyper

Demand-Pull Inflation

When the economy is operating at Full-employment level. As the quantity of money increases, the rate of interest will fall and consequently investment will increase.

Aggregate Consumption expenditure will increase leading to an effective increase in the effective demand.

Demand –Pull Inflation

Causes of Demand – pull Inflation

1. Increase in Public Expenditure 2. Increase in Investment 3. Increase in MPC 4. Increasing Export and Surplus Balance of Payments

Cost-push Inflation

Excess of general demand but by an increase in costs, as factor of production try to increase their share of the total product by raising their prices.

Thus a rise in wages leads to a rise in the total cost of production and a consequent rise in the price level because fundamentally, prices are based on costs.

Cost-push Inflation

Phillips Curve

Phillips curve is a historical inverse relationship between the rate of Unemployment and the rate of inflation in an economy. Stated simply, lower unemployment in an economy is correlated with a higher rate of inflation.

This means that when unemployment rate is low, it requires a higher push up of inflation rate to bring down unemployment rate.

Inflation Rate (%) Unemployment Rate (%)

10 5

9 6

8 8

7 11

6 15

5 20

Inflation Rate

Okun's law

It is an empirically observed relationship relating unemployment to losses in a country's production.

 The "gap version" states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its Potential GDP.

Supply- side Economics

Supply-side economics is a school of macro economics that argues that economics growth can be most effectively created by lowering barriers for people to produce (supply) goods and services as well as invest in capital.

According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices; furthermore, the investment and expansion of businesses will increase the demand for employees. Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.