Chapter No 4

Unemployment
& Inflation

Prepared By
Kokab Manzoor
Outline:
 Definition of Unemployment and its types
 Types of unemployment
 Causes & Consequences of Unemployment
 Remedial Measures
 Definition of Inflation
 Kinds of inflations
 Causes of inflation
 Measurement to control inflation
Definition

• Unemployment refers to the situation where

the people of a country do not find work to earn
their livelihood.
OR
• Unemployment is situation when people want
to do job but they are unable to find the job.
Types of unemployment

1. Structural unemployment
2. Seasonal unemployment
3. Frictional unemployment
4. Cyclical unemployment
5. Technological unemployment
Structural Unemployment

Structure unemployment is the result of change in the

structure of the economy. Changes in the economy
can be of various types.
For example;
1)Change from agriculture to industry or vice versa .
2)Change in the structure of the industry.
Seasonal Unemployment

The seasonal unemployment arises because of the

seasonal character of a particular productive activity
so that people become unemployed during the slack
season.
◦ E.g. ice factory, sugar factory.
 Frictional Unemployment
Frictional unemployment exists when people are temporarily out
of work.

In other words, the period in which a person quit from one job
and to find the other one is called period of frictional
unemployment.

It occurs due to immobility of labor, shortage of material,

shortage of machinery and equipment etc.
 Cyclical Unemployment

In this case unemployment takes place in the depression or

recession phase of the business cycle is called cyclical
unemployment.

Depression is a period in which the aggregate demand

decreases, as a result price and profit of the producers also
decreases, which leads to high unemployment.
Technological
Unemployment
When there is automation or replacement of old technology by
the new one which needs less workers, hence causing
unemployment which is called as technological
unemployment.

Technological unemployment occurs because of introduction

of new technology in the production.
 Underemployment

It is the situation in which people are unable to find the

job according the their skills and experience, hence
willing to do any job even lower than their level of
education and experience.

E.g. a person has a Ph.D. degree but working a job of a

salesman.
Voluntary Unemployment:

Sometimes people simply do not want to do

any job, Instead they want to remain
unemployed.
It’s the unemployment by the ones own will.
 Natural Rate of Unemployment

In every economy the 100 % employment is impossible,

so according to economists some people will be
unemployed in each and every economy, and that is called
as natural rate of unemployment.

Natural rate of unemployment is between 4-6 %.

It is also called as full employment.

Causes of Unemployment:

1.Increase in Population
2.Rural-Urban Migration
3.Downsizing
4.Lack of Capital
5.Lack of Credit Facility
6.Seasonal Variations
7.Technological Advancement
8.Lack of Skill and Work Experience
9.Lack of Education
Consequences of Unemployment

1.Rise in Criminal Activity

2.Violence
3.Drug Addiction
4.Terrorism
5.Social and moral evils
Solutions for Unemployment

1.Establishment of Small and Medium Scale Industries

2.Vocational and Technical Training Centers
3.Encouragement of Construction Industry
4.Internship Programs
5.Provision of easy credit
Concept of Labor Force
 Labor Force . The number of people who are above 15
0r 16 years of age (employed plus unemployed) are
called as labor force.
Labor Force = employed + unemployed

 Not in Labor Force. A person who is not looking for a

job because he or she does not want to do a job.
 The Labor Force Participation
The labour force participation rate is the ratio of
labour force to the population (age of 16 or above).
This basically shows the portion of population that is
contributing to labour force.

Labor force participation = (labor force/Population) x 100

How to calculate unemployment Rate?

Unemployment Rate. The unemployment rate is ratio of the

number of people unemployed to the total number of people in
the labor force.

Unemployment rate = (Unemployed / labor Force) X 100

Example. If the labor force is 15 million and 3mn are

unemployed then the unemployment rate is;
(3/15) X 100 = 20 %
INFLATION
Definition
The persistent increase in the general price
level of a country is known as Inflation
OR
When too much money chase too few goods
is called inflation.
Kinds of Inflation
1. Demand pull inflation
2. Cost push
3. Stagflation

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 1.Demand pull inflation:

It is a situation where the aggregate demand

persistently exceeds the available supply of
output, which causes the general price level to
go up.
Causes of Demand Pull Inflation:

The following are the main causes of demand-pull

inflation:
1.Population growth:
2.Deficit Financing:
3.Increase in wages:
4.Foreign Remittance:
2) Cost-push inflation:

It is a situation where a rise in the general price level is

initiated and sustained by rising cost due to which prices
go up.

For example, when the cost of raw material goes up, then
the price of goods also go up which leads to inflation
Causes of Cost-Push Inflation:

The following are the main causes of Cost-Push inflation:

1.Increase in Cost of Raw Materials:

2.Increase in wage rates:
3.Decrease In production:
4.Imported inflation:
5.Indirect taxes:
 3) Stagflation
This is a combination of two words i.e. stagnation of
the economy and inflation in the economy.
The condition of the economy where the price
increase in the economy with the high unemployment
is called stagflation.

One of the basic reason of stagflation is the decrease

in the aggregate supply.

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 How inflation is calculated?
There are various formulas for calculating Inflation rate.
One of the most common formula is CPI ( Consumer Price
Index).
It is calculated as;

CPI = current price level – previous price level × 100

previous price level

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Measures to control inflation
Two kinds of measures are used to control inflation.

1.Monetary policy

2.Fiscal policy
Monetary policy:

A policy adopted by the central bank to manage the

money supply and money demand in the country is
known as Monetary Policy.

How Monetary policy is used to control inflation?

i) Central Bank reduces the money supply by selling bonds etc.

ii) The central bank rises its interest rate for the commercial banks
 2: Fiscal policy:
It is the policy made by govt. to manage the public
revenue and public expenditure.

How fiscal policy is used to control inflation?

a. Govt. can reduce public expenditures.

b. Government rises the direct taxes to discourage the
consumption thus aggregate demand for goods falls and
inflation is controlled.
Thank
You