UNIT- 5

UNEMPLOYMENT & INFLATION

 UNEMPLOYMENT

 Unemployment is a term referring to

individuals who are employable and
actively seeking a job but are unable
to find a job.
 Usually measured by the
unemployment rate, which is dividing
the number of unemployed people by
the total number of people in the
workforce.
 Unemployment serves as one of
the indicators of a country’s economic
status.
 TYPES OF UNEMPLOYMENT

SEASONAL FRICTIONAL CYCLIC

UNEMPLOYMENT UNEMPLOYMENT UNEMPLOYMENT

STRUCTURAL DISGUISED CHRONIC

UNEMPLOYMENT UNEMPLOYMENT UNEMPLOYMENT
 STRUCTURAL UNEMPLOYMENT

 It refers to unemployment that occurs when

workers are not qualified for the jobs that are
available.
 Workers in this case are often out of work for
much longer periods of time and often require
retraining.
 Advances in technology and changes in market
conditions often turn many skills obsolete; this
typically increases the unemployment rate.
 Structural unemployment is most evident in
industries undergoing technological
advancements. For example, much of the work
in the farming industry is becoming
mechanized, meaning fewer farmers are
necessary, and many lose work.
 SEASONAL UNEMPLOYMENT
 Seasonal unemployment refers to the time
period when the demand for labor or
workforce is lower than normal under
certain conditions, however, such a situation
is only temporary and employment reverts
to normal thereafter.
 The seasonal unemployment is prevalent in
those industries which are engaged in
seasonal production activities.
 Such as agricultural industry wherein the
demand for workers is more during
harvesting than is required in other months
in a year.
 CYCLICAL UNEMPLOYMENT
 The Cyclical Unemployment refers to the change in the employment rate
due to the change in the economic cycle, such as recession.
 During a recession, the unemployment increases as the demand for the
commodities fall which leads to less production and ultimately fewer
workers are needed.
 On the other hand, when the economy grows the rate of unemployment
decreases as the consumers demand more goods and services, the
production increases and ultimately more workers will be hired to meet
the demand.
 The Great Recession of 2008 is an example of cyclical unemployment.
Companies went bankrupt, and businesses closed down, leading to
increased unemployment worldwide.
 FRICTIONAL UNEMPLOYMENT
 The Frictional Unemployment also called
as Search Unemployment, refers to the
time lag between the jobs when an
individual is searching for a new job or is
switching between the jobs.
 The frictional unemployment is
temporary and lasts for a short period of
time, i.e. from the time employee leaves
his job and join a new job.
 It is often considered as a voluntary
unemployment because it is not caused
due to the shortage of job, but in fact,
the workers themselves quit their jobs in
search of better opportunities.
 DISGUISED UNEMPLOYMENT
 The Disguised Unemployment refers to
the work area where surplus manpower
is employed out of which some
individuals have zero or almost zero
marginal productivity such that if they
are removed the total level of output
remains unchanged.

 In other words, More workers employed

on a single piece of work than actually
required is called as the disguised
unemployment.
 CHRONIC UNEMPLOYMENT
 Chronic Unemployment means prolonged unemployment in the
economy. In other words, chronic unemployment is caused due
to the long-term unemployment persisting in the economy.
 Economies suffer from the chronic unemployment because of
one of the following major reasons:
 Slower Economic Growth

 Rapid Population Growth

 Immobility of Workforce

 Lack of skills
 CAUSES OF UNEMPLOYMENT

 Slow rate of economic growth

 Population Explosion
 Defective educational System
 Absence of manpower planning
 Slow growth in agricultural sector
 Inadequate employment planning
 Technological changes
 Caste System:
 In India caste system is prevalent. The work is prohibited for specific
castes in some areas.
 In many cases, the work is not given to the deserving candidates but
given to the person belonging to a particular community. So this gives
rise to unemployment.

 Slow Growth of Industrialization:

 The rate of industrial growth is slow. Though emphasis is laid on
industrialization yet the avenues of employment created by
industrialization are very few.
CONSEQUENCES OF UNEMPLOYMENT

 Increase in poverty and inequality

 Increase in crime levels
 Low standard of living
 Social unrest and political instability
 Loss of competitiveness in world economy
 Low human capital formation
 Burden on Government
 Lower GDP for the economy. High unemployment indicates the economy is operating
below full capacity and is inefficient; this will lead to lower output and incomes. The
unemployed are also unable to purchase as many goods, so will contribute to lower
spending and lower output.
 Increase in social problems. Areas of high unemployment (especially youth
unemployment) tend to have more crime and vandalism. It can lead to alienation and
difficulties in integrating young unemployed people into society.
 Political instability. The period of mass unemployment in the 1930s led to social unrest.
In Germany, an unemployment rate of 6 million was an important factor in the rise of
Hitler and the Nazi party.
 Lost human capital. If people are out of work, they miss out on ‘on the job training’ This
is a vital component of human capital and labour skills; high rates of unemployment can
reduce labour productivity. If someone is out of work for two years, they miss out on the
latest working practices and trends. Being unemployed can also affect the confidence of
the unemployed and they become less employable in the future.
 Stress and health problems of being unemployed. Amongst studies of
unemployed men, signs of depression, mental anxiety, and health
problems are noticeably higher. (Effects of unemployment on health
(US Library of Health) According to a study by Gallup, “About one in
five Americans who have been unemployed for a year or more say they
currently have or are being treated for depression — almost double the
rate among those who have been unemployed for five weeks or less.”
 Another study found that common outcomes of unemployment
include depression, substance abuse, admissions to psychiatric
hospitals, death by suicide, and violence. (1)
 Increased government borrowing. Higher unemployment will cause a fall in tax
revenue because there are fewer people paying income tax and also spending less
(hence lower VAT). Also, the government will have to spend more on unemployment
and related benefits. The government doesn’t just pay unemployment benefit, but a
family who has unemployment will be more likely to receive housing benefit and
income support.
 CURES FOR UNEMPLOYMENT
 Emphasis on Vocational and technical training
 Encouraging self- employment
 Focused policy implementation
 Creation of diversified job opportunities
 Reduce discrimination in job
 Enhanced focus on entrepreneurial, communication and
interpersonal skill development
 Inviting larger capital investments
 Improved infrastructure in agriculture
 GOVERNMENT POLICIES TO REDUCE
UNEMPLOYMENT
 Integrated Rural Development Programme (IRDP)
The Government of India introduced IRDP in 1978-79, intending to create full
employment opportunities in the rural areas. This program included agriculture,
forests, fisheries, animal husbandry, cottage industries, construction of canals,
roads, and so on.

 National Rural Employment Guarantee Act

This act was later named as Mahatma Gandhi National Rural Employment
Guarantee Act– MGNREGA. It aims to guarantee the Right to Work and was
passed in September 2005.
 CONT…
 The Swaran Jayanti Rozgar Yojana
The plan, which started on 1st December, is meant for providing employment to
unemployed in urban areas. It aims at providing self or wage employment to
unemployed youth of urban areas.

 Food- for- work Programme

This program was started in 1977, its objective was to generate employment,
improvement, create durable community assets, and strengthen the rural
infrastructure.
 INFLATION
 In economics, inflation is a
general rise in the price level of
an economy over a period of
time.
 When the general price level
rises, each unit of currency buys
fewer goods and services;
consequently, inflation reflects a
reduction in the purchasing
power per unit of money – a loss
of real value in the medium of
exchange and unit of account
within the economy.
 CONT…
 Inflation leads to a decline in the value of money. “Inflation means that
your money won’t buy as much today as you could yesterday.”

 If the prices of goods rise, the same amount of money will purchase a
smaller quantity of goods.

 According to Keynes “ Inflation is an imbalance between aggregate

demand and aggregate supply”

 If in an economy aggregate demand for goods and services exceeds

aggregate supply, then prices will go on rising.
TYPES OF INFLATION
 DEMAND PULL INFLATION
 The demand-pull inflation exists when
the aggregate demand increases
rapidly than the aggregate supply.
 In other words, for a given level of
aggregate supply the aggregate
demand increases manifold, then the
demand-pull inflation occurs.
 This increase in the demand can be
due to the monetary factors i.e.,
increase in money supply and real
factors, Viz. Cut in tax rates, increase in
government expenditure, upward shift
in investment function, etc.
 COST PUSH INFLATION
 The Cost-Push inflation occurs when
the cost of raw material, labor, and
inputs necessary for the production of
final goods increases.
 Strong labor unions force the wage
price to go up that leads to an increase
in the price of goods and services. This
rise in the price level is called as wage-
push inflation
 Another kind of cost-push inflation is
the supply-shock inflation when the
firms restrict the aggregate supply of
goods and services.
 MODERATE INFLATION

 The moderate inflation, also called as Creeping Inflation refers to

a single digit annual increase in the general price level.
 During the moderate period, the price increases persistently, but
at a mild or moderate rate, i.e. less than 10% or a single digit
inflation rate.
 GALLOPING INFLATION

 The galloping inflation refers to the exceptionally high inflation

rate that leads to an increase in the general price level.
 Generally, the inflation is in double or triple digit and is reflected
in the high price of goods and services, i.e. prices increase
manifold.
 The double-digit inflation varies from 10% to 999% per annum
and there is a great difference between these two limits.
 HYPER INFLATION

 Hyper inflation is the situation when the prices rise at an

alarmingly high rate, i.e. more than a three-digit per annum.
 The prices rising above 1000% per annum marks the beginning
of hyper inflation.
 During this period, the paper currency becomes worthless, and
people start trading in kind, such as gold and silver and often
resort to the old barter system of commerce.
 CAUSES OF INFLATION

 Increase in Public Spending

 Population Growth
 Hoarding
 Tax Reduction
 The imposition of Indirect Taxes
 Price-rise in the International Markets
 Deficit Financing of Government Spending
 Increased Velocity of Circulation
 Genuine Shortage
 Exports
 CONSEQUENCES OF INFLATION
 Greater uncertainty
 There may be greater uncertainty for both firms and households. Firms will
postpone their investment due to uncertainty in the market. This will result in
negative implications on the economic growth in the economy.

 Redistributive effects
 High rate of inflation will affect people who have constant incomes, such as
retired people, students, and dependents. Moreover, rise in prices of essential
commodities (food & clothing) will affect the poor segment of the society as
they spend a major part of their income on these good.
 This will lead to increased inequality in the economy.
 CONT…
 Less saving
 High rate of inflation will have an adverse effect on the savings in the
economy. As people spend more to sustain their present standard of living,
less is being saved. This will result in less loanable funds being available to
firms for investment.

 Damage to export competitiveness

 High rate of inflation will hit hard the export industry in the economy. The
cost of production will rise and the exports will become less competitive in
the international market. Thus, inflation has an adverse effect on the balance
of payments.
 CONT…

 Social unrest
 High rate of inflation leads to social unrest in the economy. There is increase
dissatisfaction in among the workers as they demand higher wages to sustain
their present living standard.

 Interest rates
 The Central Bank might use monetary tools to control high inflation rate by
increasing interest rates. This will increase the cost of borrowing and will have a
negative effect on both consumption and investment.
 MEASURES TO CONTROL INFLATION

MONETARY MEASURES

 The most important and commonly used measure to control inflation is

monetary policy of the central bank.
 Monetary measures used to control inflation include:
 Bank rate policy or Credit Control
 Cash reserve ratio
 Open market operations
 Fixed Exchange rate
 CONT…

FISCAL MEASURES

 Monetary policy alone is incapable of controlling inflation. It should, therefore, be

supplemented by fiscal measures. Fiscal measures are highly effective for controlling
government expenditure, personal consumption expenditure, and private and public
investment.
 Reduction in Unnecessary Expenditure

 Increase in Taxes

 Increase in Savings
 CONT…

OTHER MEASURES

 Increase in the production capacity

 Rationing
 Rational wage policy
 Proper investment policy
 Proper commercial Policies
Thank you!!