TOPIC 3

INFLATION AND
UNEMPLOYMENT
(BY NAZMI @ NAZNI B NOORDIN, FSPPP UITM KEDAH)
LEARNING OBJECTIVES

 To see the patterns of Malaysia income

distribution.

 To identify the cause of income inequality.

 To explain unemployment trend, types, causes

and strategies.

 To examine the definition and the types of

inflation.
FISCAL POLICY IN ECONOMIC GROWTH
 Fiscal Policy = aggressively using money as an injection to of millions
and billions of ringgit into the economic system of the country to boost
grow and stability.

 Fiscal Policy as a tool of the government to control inflation and

recession.

 Inflation = increase in the prices of goods and services in a country.

 Recession = a period when economy of a country is not very successful.

 Fiscal Policy as a strategy to encourage public spending.

 Fiscal Policy will encourage “multiplier effects” of the economy.

INFLATION
WHAT IS INFLATION ?
 Inflation = increase in the prices of goods
and services in a country.

 Inflation is measured, as the annual percent

change in the prices of goods deemed
necessary for life in that country.

 The specific goods included in this “basket

market” change only rarely, so this measures
reflects fluctuation in purchasing power of
the national currency.

 To much money running over a few goods.

TYPES OF INFLATION

1. Demand-pull inflation

2. Cost-push inflation

3. Imported inflation
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.
1. DEMAND-PULL INFLATION – CONT’D
 Also 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.

 Example : price of houses.

2. COST-PUSH INFLATION

 This inflation exists during full-employment has

been achieved in the economy.

 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.
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.
UNEMPLOYMENT
UNEMPLOYMENT

 Unemployment is measured annually as the

percent of 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 for the job.
REASON FOR UNEMPLOYMENT OR REASON FOR
INABILITY TO SECURE JOBS.

1. Lack of technical skills.

2. Economic slowdown.

3. Competition from skilled and cheap migrant

worker.

4. Competition from overseas graduate who are

more competent.

5. Poor or lack in soft skills.

REASON FOR UNEMPLOYMENT OR REASON
FOR INABILITY TO SECURE JOBS – CONT’D

6. Slow growth in job creation - The slow growth of

job creation continued throughout the 1st
Malaysia Plan (1MP). During that period (1966-
1970), the rate of employment growth for
Malaysia averaged only 2.8% annually. One of
the main reasons is because of low marginal
contribution of the agricultural sector to new job
creation.
TYPES OF 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.

2. Cyclical unemployment (also known as

Demand deficient): 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. In another time,
demand decreased & force the industry to produce less
and to reduce the employees.
TYPES OF UNEMPLOYMENT-CONT’D
3. Seasonal unemployment: this type of
unemployment usually exists in the agricultural sector,
where much of the activities will depend on good weather/
season. Most of the activities in the agricultural sector
have to be stopped under bad condition.

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.
TYPES OF UNEMPLOYMENT-CONT’D

5. Real Wage Unemployment - Real Wage

unemployment occurs when wages are above
the equilibrium level causing the supply of
labour to be greater than demand.

For example, a fall in demand for labour (due to

demand side shock) could cause unemployment,
if wages are kept at their old level. Classical
economists argue the solution is to cut wages to
reduce unemployment.
EMPLOYMENT CREATION IN BOTH
RURAL AND URBAN AREA
 Rural areas - For the rural areas government had
planned to expand employment opportunities through
new land development schemes, establishment of new
growth centers and the absorption of excess labor in
other sectors of the economy.

 Urban areas -The strategy focused on expanding

job opportunities in manufacturing and construction,
including the promotion of small-scale industries.
MALAYSIA EFFORTS AT COMBATING
UNEMPLOYMENT

1. Generating jobs/ jobs creation through economic growth.

2. Equipping new labor market entrants with the right

knowledge and skills.

3. Improving job matching.

4. Widening the access to training and re-training.

5. A culture of life-long learning.

STEPS TO REDUCE UNEMPLOYMENT
AMONG GRADUATES IN MALAYSIA

1. GTS (Graduate Training Scheme) – provides

more opportunity for young & fresh graduate to
further their study and skills.

2. Government taking more graduates into public

sector.

3. Government provide incentives to young

graduates like capital to start small business
etc.
STEPS TO REDUCE UNEMPLOYMENT
AMONG GRADUATES IN MALAYSIA- CONT’D

4. Government’s role in attracting more foreign

companies to invest and open companies in
Malaysia.

5. Reduce taking foreign workers especially among

graduates or skilled workers. Government
should train local graduates to take up those
offers.
ROLES OF GOVERNMENT

 Unemployment benefits.

 To recruit more people into public sector.

 To train and re-train employee especially

graduate (GTS).

 To reduce the intake of foreign workers.

ROLE OF PRIVATE SECTOR
 To expand current business operations.

 Not to depends very much on technology and

machine only.

 Invest in training and development of employees.

 To recruit more local workers.

ROLES OF GOVERNMENT UNDER FISCAL AND
MONETARY POLICY IN TACKLING HIGH INFLATION &
UNEMPLOYMENT RATE.

 Fiscal Policy – refers to the rate of taxation &

level of government spending, government’s
management of the economy by varying the size
& the type of taxation, public debt and
government expenditure & government funds.

 It is the deliberate adjustment of government

revenue & expenditure for the purpose of
obtaining greater economic stability.
OBJECTIVE OF FISCAL POLICY

1. To manage the economy efficiently.

2. To achieve high economic growth.

3. To raise the general level of real income &

aggregate demand.

4. To redistribute income & resources efficiently.

OBJECTIVE OF FISCAL POLICY – CONT’D

 During high inflation - government will

increase tax rate & reduce government
expenditure to increase private consumption &
reduce supply money in the economy.

 During high unemployment – government

will reduce tax rate & increase government
expenditure to increase money supply in the
economy & high standard of living.
MONETARY POLICY
 Affects the supply of money and the rate of interest.

 Government use monetary & fiscal policy to achieve goals

for output & employment growth & price stability.

 During inflation, government increased interest rate,

decreased expenditures & wage-price control to reduce
spending.

 During high unemployment, government reduces

interest rate, expand bank credit, decrease tax rates &
increase government spending.
IMPLICATIONS OF RECESSION TO
MALAYSIAN ECONOMY
1. Export earning – decrease.
2. Current account and BOP (Balance of Payment).
3. Economic growth - slowdown
4. Retrenchment & Unemployment - high
5. Poverty – increase.
6. Drop in Investment – FDI & local
7. Slowdown in industrial activities
8. Decrease in domestic spending
9. Drop in real wages (private sectors)
10. Best talents/ workers go abroad in search for better wages
or job opportunities.
TUTORIAL
1. Assess the current GDP in relations to the
unemployment and inflation rate in Malaysia.
Also, kindly touch on the effort made by the
government to overcome those problem.

2. Is there any relationship between inflation and

unemployment? Explain.
END OF TOPIC 3

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