CHAPTER 3:

UNEMPLOYMENT AND INFLATION

Learning Outcomes
 Understand the concepts of unemployment
& inflation
 Understand the factors contributing towards
unemployment & inflation
 Understand the effects of unemployment &
inflation to consumers, producers and
government of Malaysia
 Understand the role played by policy
makers to reduce unemployment & inflation
in terms of short term and long term
polices.
TRENDS IN INCOME DISTRIBUTION
 Income distribution is closely related with poverty

 Income imbalance occurred between different ethnic

group, urban-rural population, regions and states.

 The general definition of income distribution is how the

nation’s wealth is distribute among its citizens.

 In Malaysia, for instance, how the national income is

distributed among Malaysians based on race, area and
other criteria set by the government

 In economics, income distribution is how a nation’s total

economy is distributed amongst its population.
Cont…
 Income Distribution in Malaysia – significant imbalance of wealth
among races (economic functions, education and location).

 Therefore, it is the role of the government in ensuring equal

income distribution among society.

 Various policies and strategies are undertaken by the government.

 Progressive income tax, for instance can reduce the income gap
between the rich and the poor.

 Provision of subsidies and scholarships to the poor and needy

students are some of the government initiatives to eradicate
poverty while reducing the income gap between the rich and the
poor.
Cont…
 However, it is not easy task for the
government because the rich are complaining
that they are burden by the government to
help the poor who are economically backward.

if the poor work hard

 Their perception is “
and spend wisely, there is no need for
asking assistance from the
government”.
 What is you say on this statement??
 Income Distribution in Malaysia

 1970s - 1990; 1991 – 2000s - government implemented the

NEP & NDP respectively as the main thrust for balanced
development, which emphasized on the eradication of poverty &
restructuring of society.

 Malaysia’s efforts to reduce poverty and ethnic differentials have

had a positive impact on income inequality.

 Poverty reduction strategies which emphasized in increasing

income levels of the poor at a faster rate than rest of the
population contributed significantly to reducing inter ethnic
income inequalities.

 As the result the incidence of poverty decreased and overall

income inequality narrowed – after 2000
The Income Inequality basically
exist because of:
 Differences in human skills and ownership of
assets

 Differences in access to capital, experienced

 Differences in educational attainment

 Differences in employment pattern

Unemployment
 What is unemployment??

 Is unemployment a macro
problem?
UNEMPLOYMENT

 Unemployment define as those of working age who is without

work. Existence of a section of labor force able & willing to
work but unable to find gainful employment

 Unemployment is measured annually as the percent of the

labor force that cannot find a job. 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.

 Economies are powered by consumer spending and savings

investment.

 Unemployed workers earn no wages; they spend little and save

less. Economies with high levels of unemployment are stalled
economies.
Unemployment rate
Labor Force
 LF includes any member of a household who is 15 years of age
or older whether he or she is employed.

 Not in labor force: household workers, students, retirees,

persons with disabilities, discouraged workers, institutionalized
persons.
 The civilian labor force is a term used by the Bureau of Labor
Statistics to refer to Americans whom it considers either
employed or unemployed; military personnel, federal
government employees, retirees, handicapped or discouraged
workers, and agricultural workers are not part of the civilian
labor force
 Factors that determine size of labor force including the size of
the population, the growth of the population, the sex
distribution, and the age distribution.
 Unemployment in Malaysia
Population
27 million

Labour force Non-labour force

12.5 million 14.5 million

House wives
Currently not working
Currently working Students
Unemployment
12 million Pensioners
0.5 million disabled
Unemployment rate
 Based on that figure, we can see that the unemployment
falls under the category of “people who are seeking for jobs
but unable to find one”.

 The unemployment rate in Malaysia :-

 Unemployment rate in Malaysia (example):

= 0.5 million / 12.5 million X 100 % = 4%

 2019 – 3.3%

 2020 – 4.8 %

 2021 – 4.9 %
 According to the Department of Statistics Malaysia
(DOSM) - Malaysia’s unemployment rate rose 4.9% in
2021 - the highest rate recorded since 1993

 Has increased slightly to 4.9%, as compared to 4.8% in

December 2020. The number of unemployed persons,
rose from 772,900 in December 2020 to 782,500 in
January 2021.

 The largest composition of employed persons was aged

between 25 to 34 (33.6%) while youth aged 15 to 24
contributed 14.9 per cent in 2021
Is unemployment is really a macro issues
in Malaysia?
 YES!!!

 Rate of unemployment 4.9%, but our graduates are the

ones who is unemployed.

 Statistics shows that there are about 188 000 graduates

both with diploma and degree are searching for the right
job to match their qualifications

 Refer to the how many people todays scenario - laid off

and offers with VSS - It was the highest jobless rate
since the series began in March 1998 (economic crisis)

 The unemployment rate in Malaysia jumped to 4.9

percent in 2021 - impact caused by the COVID-19
pandemic.
 So who is the most affected group?
 For sure, people may say poor people most
affected.

 But, it depends on your current financial situation.

 People that have NO SAVINGS suffered the most.

 People that pretend to be rich suffered too.

 However, middle-income group suffers the most

since need to work harder to solve today’s
challenges – B40 & M40 (cost of living increased)
Rich Get Richer, Poor Get
Poorer
 Cash is King now, who own cash
then that person can do anything's.
Reasons
 Slow growth in job creation
 Technology advancement
 Education advancement
 Lack of confidence/communication skill
 Moving from labor intensive to capital intensive
 Globalization
 Immigrants –illegal
 Government policy
 Pandemic Covid-19
Types of unemployment
 Frictional unemployment

 Structural unemployment

 Seasonal unemployment

 Cyclical unemployment

 Voluntary unemployment

 Technological 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.

 Many firms have to reduce the number of workers and this will
contribute to unemployment problems within the country.

 Arises when the structure of the economy changes causes either

by a change in the pattern of demand or a change in the
methods of production

 Not a short term situation, instead it is long term or possibly

permanent due to the nonexistence of jobs for unemployed
workers
2. Cyclical unemployment:

 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.

 Thus, firms have to use more labor in producing more

output. Under low aggregate demand in the economy,
firms have to reduce the number of goods produce.

 Thus they have to reduce the number of labor force used

by making lay-off or retrenchment. This will contribute to
higher unemployment level.

 It is directly attributable to the lack of jobs caused by the

business cycle
3. Seasonal unemployment:

 This type on unemployment usually exists in

the agricultural sector, where much of the
activities will depend on good whether. Most of
the activities in the agricultural sector have to
be stopped under bad condition.

 Thus, this will contribute to seasonal

unemployment.
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.

 The industries are competing to find better

workers by offering better working environment.
5. voluntary unemployment:

 People voluntary decides not to work and

therefore will be unemployed.

 For example, a mother who deliver a child

decides to resign from her job on a voluntary
basis to take care of her child.
5. Technological unemployment:
 Unemployment caused when
developments in technology replace
human effort
Impacts of Unemployment

Unemployment can create problems to everyone in every aspect of a

country

1. Social problems
 Inadequate money to spend causing family instability
 long term unemployment causing loose human capital capability
 Increase in the rate of crime rates and social problems among
the members of the society

2. Economic problems – lost of GDP as unemployment rises

3. Political problems – unemployment can cause a political

unstable government and country which affects FDI and etc
 Malaysia effort at Combating
Unemployment
1. Generating Jobs through economic growth

 Current economic planning is focused on the

development of a knowledge-based economy in which
human capital is particular importance.

 In this respect, Malaysia’s k-economy Master Plan

focused on the development of Malaysia’s human
resources as a means to lift economic growth to a
higher level.

 Under the K-Economy Master Plan, projects such as the

Multimedia Super Corridor is expected to generate more
jobs, especially in the IT sector.
 2. Combating external Shocks

 Malaysia’s past experience during the 1970’s, mid

1980’s and the 1997/98 Asian Financial crisis that
resulted in the negative consequences of currency
speculators have shown that the economic of developing
nations are vulnerable to the external shocks.

 Such conditions create recessionary pressures and

result in unemployment.

 Therefore, the Malaysian strategies since 1970’s have

focus on creating national economic resilience and
strengthening its competitiveness through economic
reforms and industrial diversification.
3. Equipping new labor market entrants
with the right knowledge and skills

 One of the principles causes of unemployment

is a mismatch between the requirements of
industry and the knowledge and skills
possessed by the workers.

 Thus government should create a mechanism

for collaboration between industry and
business and the educational and training
institution to produce graduate that meet the
requirement of the labor market.
4. Improving job matching

 Enables employers to seek out the right

employees.

 Ministry of HR has harnessed the enabling

power of info. Technologies create electronic
labor.

 Example; IT student – It sectors

5. Widening the access to
training and re-training
 Workers must maintain their employability
through training and retraining.

 Malaysian government has addressed this issue

by imposing a training levy on employer for the
creation of a HRD fund for the purpose of
training and retraining.
6. A culture of life-long learning

 Continually maintained through the combined

efforts of government, employers and the
workers themselves.

 Employer invests capital and the government

provides HR development facilities, financial
assistance.

 While workers possess the right work values and

the desire to continually maintain their
employability.
Cont…
 Malaysia adopted some strategies to create job such adopting
new technology with high value-added in the Industrial Master
Plan (IMP) such as:
- biotechnology, nanotechnology, photonics, ICT and
advance manufacturing.

 Under the Ninth Malaysia Plan (2006-2010) Malaysia continued

to develop and strengthen economic activities within the field
of ICT.

 Other than that, Malaysia also increasing trade, enhancing the

development of small and medium enterprises, recognizing the
importance of self-employment and increasing public-private
sector partnerships.

 Majority of employment are in the services and manufacturing

sectors.
7. to train/re-train unemployed
especially graduates
 Government has launched many programs such
as Graduate Training Scheme (GTS), MLVK
(Majlis Latihan Vokasional Kebangsaan) to help
Malaysians to further their studies while getting
paid by the government.

 Indirectly, this has reduced the total number of

unemployed in Malaysia.

 Government also tries to get a job for those who

have completed their course
Others efforts..

Role of Government

a. Creation of job opportunities

b. Education and training programs – to
provide students with relevant skills
c. Foreign Direct Investment
d. Government policies
e. Unemployment benefits
Role of private sectors

a. Reduce retrenchments
b. Expansion of business
c. Giving priority to local graduates
d. Training & development programs
INFLATION
INFLATION
 Inflation is defined as sustained increase in the general
price level in the economy over a period of time. It has
overwhelmingly more negative effects for decision making
in the economy and reduces purchasing power.

 Can you imagine a situation where an egg will cost

you RM 250 and at the same time many of your
friends are seeking for jobs…..

 This is exactly what many Malaysians have experienced

during the 1997-1998 financial crisis. The general price
level good and services increased more than 100% and due
to crisis many companies were close down and many
employees were retrenched/unemployed.
INFLATION
 Inflation is measured, as the annual percent change
in the prices of goods deemed necessary for life in
that country.

 A continuous increase in the general price

level

 High level of inflation reflects a volatile economy in

which money does not hold its value for long.

 In a lay man term….”a lot of money chasing

after few goods”
Cont..
 Inflation can be measured by several price indices
such as consumer price index and producer price
index

 In Malaysia inflation is measured by CPI published

monthly by Department of Statistics Malaysia.

 CPI - A measure of price changes in consumer goods

and services such as gasoline, food, clothing and
automobiles. The CPI measures price change from the
perspective of the purchaser.
Types of Inflation "triangle
model":
1. Demand-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.
Cont..
 This type of inflation also can 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. Examples price
of houses.
Cont..
 In other words, consumer have the money but
there are limited supply of goods and services.

 Therefore, supplier will take the opportunity to

raise the price and moreover consumers willing
to pay.

 As a result, the price will increase and it will

create demand pull inflation.
Cont..
 This is what Malaysian experienced during the
2007-2008 global economic crisis where the
CPI was reported around 7.8% somewhere in
June 2008.

 Many Malaysian suffered when the oil price

shot up so much and the government was
unable to control the domestic price as the
world crude oil price was high too.
2. Cost-push inflation
 Occurs when there is persistent rise in the cost of production
increase due to many factors such as increase in the price of
raw materials, demand for wage increase by the union,
currency depreciation, global economic crisis, change in
government policies etc.

 As a result, the suppliers or producer will reduce their total

supply in order to reduce the cost of production.

 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.
 Why there is increase in cost of
production?
a. Increase in the prices of raw
materials
b. labour cost increases
c. labour union demand higher salary
d. currency depreciation
e. global economic crisis
Cont..
 For example, many Malaysian firms especially the
Small Medium Industries suffered with cost push
inflation during the Asian financial crisis where
our currency (RM) depreciated due to excess
supply in the FORES market and the exchange
rate went down from 1 US = RM2.40 to 1 US =
RM4.80

 Can you imagine this scenario…..if you are businessman and

importing raw material for your plant, you are paying double
the price to get the same quantity of materials as compared
with before crisis.
3. Imported 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.
Cont..
 This is caused by the trading country which
faces inflation and when they export their
goods and services, indirectly they are also
exporting their inflation to the importing
country.
Implications of Inflation
1. Low inflation

 Benefited Malaysian economy particularly in

encouraging private consumption and supporting
national savings

 For the consumer, low inflation leads to higher

real income and thus real purchasing power, this
will lead to higher consumption spending which is
imperative for sustainable economic development
Cont..
2. High inflation

 price of product increase cannot compete in

international market

 lesser consumer spending and investment forced

economy to slow down.
The impact of inflation
 As discussed earlier, inflation is bad for all. Therefore
what the problems caused by inflation???

1. Menu costs of inflation

– everyone has to pay more to buy the same
basket of goods and services. The overall price
level has gone up and this will affect the real
of the consumers. As a result, they become
worse-off.
Cont..
2. Loss of purchasing – an increase in the price level but
no increase or lower increase in the monthly income
(nominal income) will reduce the real income

 (real income = nominal income / price level)

 For example,

Nominal income = RM1000 a month

General price level = RM50
Real Income = RM1000 / RM 50 = 20 units
Cont..
 Now, let’s assume the general price level has
gone up by 50% while the nominal income
increased only by 20%....

 Nominal income = RM1000+RM200 = RM1200 a month

General price level = RM50+RM25 = RM75
Real income = RM1200 / RM75 = 16 units

 So, from the above, you can see that the

consumer is now worse-off even though there
is an increase in his/her monthly income.
Cont..
3. Uncertainty and lack of investment – for
investors, inflation will make to be more
careful in their decision in term of investment.
They will prefer to take the approach of “wait
and see” because inflation can affect their
return on investment.

4. Increase resources used to cope with inflation

– the government has to use the available
resources to reduce the inflation rate. They
may have to use their saving (if any) or
borrow money to keep the inflation under
control.
Problems Associated with
Inflation
 Loss of purchasing power
 Loss of competitive advantage in the
international market
 Increase in crime rates
 Money losing its value
 Political instability
 Affects the GDP growth
Solutions to inflation
 Inflation at the early stage is good for the economic growth as
price increase will motive producers to earn more profit.

 However, if the price is beyond the control, it will lead to

instability in terms of general price level and consumers will be
worse-off.

 The two main policies that government can undertake to solve

inflation problems are:

 i) fiscal policy – government policy using taxation and

government expenditure to achieve full employment

 ii) monetary policy - government policy using money supply

and interest rate to achieve full employment

 iii) no action
 The Phillips Curve
 1958 – Professor Phillips

 Expressed a statistical relationship between the

rate of growth of money wages and unemployment
from 1861 – 1957

 Rate of growth of money wages linked to

inflationary pressure

 Led to a theory expressing a trade-off between

inflation and unemployment
Relation between unemployment & inflation
(Phillips Curve)
 Historically, inflation and unemployment have
maintained an inverse relationship, as
represented by the Phillips curve.
 Low levels of unemployment correspond with
higher inflation, while
high unemployment corresponds with
lower inflation and even deflation.
 Phillips developed the curve based on
empirical evidence.

 He studied the correlation between the

unemployment rate and wage inflation
in the United Kingdom from 1861-1957
and reported the results in 1958.
 By implementing the right policies,
governments hoped to achieve a permanent
balance between employment and inflation
that would result in long-term prosperity.

 In order to achieve and maintain such a

scenario, governments stimulate the
economy to reduce unemployment. This
action leads to higher inflation.
 When inflation reaches unacceptable levels,
the government tightens fiscal policies which
decreases inflation and increases
unemployment.

 Ideally, the perfect policy would result in an

optimal balance of low rates of inflation and
high rates of employment.
 Criticism towards Phillips Curve In mid
80s and 90s the world experienced high
inflation and high unemployment –
STAGFLATION