Continuation of Unemployment and Inflation NADZIRAH ZAINORDIN MSc

Continuation of Unemployment and Inflation NADZIRAH ZAINORDIN MSc QS [Heriot-Watt, UK], BSc (Hons) QS [IUCTT, Msia]

Relationship between unemployment and inflation Philips Curve Named after British economist WILLIAM PHILLIPS (1914-1975), Phillips curve charts the significant relationship between the percentage change in money wages and the rate of unemployment. Its main implication is that low inflation and low unemployment are incompatible, and so governments have to choose the best combination of both.

Relationship between unemployment and inflation Whenever unemployment is low, inflation tends to be high. Whenever unemployment is high, inflation tends to be low. This inverse relationship between inflation and unemployment is called the Phillips curve.

Philips curve Inflation Unemployment

Inflation-some readings http://biz.thestar.com.my/news/story.asp?file=/2011/2/24/business/8126443&sec=business

Labour Market and wage determination

The Labour Market Labour market trends Change in pattern of employment (shift from agricultural and manufacturing to service sector employment) Downsizing ( where firms reduce the size of their workforce in order to reduce costs and thereby increase profits)

Sectoral shifts in employment primary sector (agricultural) employment has declined as a share of the labour force, secondary sector (industrial) employment has declined slightly as a share of the labour force, but only in the past few decades, and tertiary sector (service sector) employment has increased as a share of the labour force.

Perfect labour markets Typical assumptions are as follows:- Everyone is a wage taker Nobody has control or say in determining wage rates. Freedom of entry- no restrictions on the move of labour; workers are free to move to alternative jobs or areas; Perfect knowledge- workers are fully aware of what jobs are available at what wage rates and what conditions of employment

The supply of labour Typically upward sloping The higher the wage rate offered, the more people will want to do the job The position of the market supply curve of labour will depend on the number of people willing and able to do the job at given wage rate; depends on three things: number of qualified people, non-wage benefits and wages and non- wage in alternative jobs Shift in whole curve

The supply of labour A change in the wage rate will cause a movement along the supply curve

Labour supply Shifts such as this may be due to: changing wages in other markets, or changes in worker tastes and preferences

Labour market equilibrium

Shift in labour market equilibrium an increase in labor demand results in an increase in both the equilibrium wage and the equilibrium level of employment, a reduction in labor demand results in a decrease in both the equilibrium wage and the equilibrium level of employment,

Shift in labour market equilibrium an increase in labor supply results in a lower equilibrium wage, but a higher equilibrium level of employment, and a reduction in labor supply results in a higher equilibrium wage, but a lower equilibrium level of employment.

Demand for labour The labor demand curve is downward sloping due to: a substitution effect, and a scale effect.

Slope of labour demand curve A change in the wage changes the quantity of labor demanded, but does not affect labor demand.

Shifts in labour demand the demand for the product, and the prices of other resources. Labour demand may shift due to changes in:

Market demand for labour The market for a given category of labour consists of all of the firms that might hire a given type of labour, regardless of the industry in which the firm operates. The market demand for labour is determined by adding together all of the industry demand for labour curves.

Market failures and Government policy

The basic sectors of the economy For economic analysis, economy can be divided into 3 basic sectors:- Consumer sector (household) Business Sector (Producer or firms) Government Sector

Economic Systems Every society needs to develop an economic system to respond to economic problem; An economic system is a particular set of institutional arrangements and a coordinating mechanism for producing goods and services; Economic systems differ as to Who owns the factors of production The methods used to motivate, coordinate and direct economic activity

Types of Economic System The Command system Also known as Socialism or Communism An economic system which most property resources are owned by the government and economic decisions are made by central government body.

The Command System-Characteristics Government owns most property resources and economic decision making occurs through a central planning board; Government owns most of business firms, which produce according to government directives; Division of output between capital and consumer goods is centrally decided and capital goods are allocated among industries on the basis of the central planning board’s long term priorities; Rely exclusively on a central plan to allocate the government owned property resources

The Market System Also known as Capitalism An economic system in which property resources are privately owned and markets and prices are used to direct and co-ordinate economic activities; Characteristics Individuals and businesses seek to achieve their economic goals through their economic goals through their own decisions regarding work, consumption or production

The Market System Characteristics – cont’d Private ownership of capital, communicates through prices and coordinates economic activity through markets; Prices are set in an open markets in which suppliers compete to sell to potential buyers; Goods and services are produced and resources are supplied by whoever is willing and able to do so; Economic decision making is widely dispersed; High monetary rewards for firms to innovate and entrepreneurs to pioneer new products and processes.

Mixed systems An economy in which both free markets and governments have significant effects on the allocation of resources and distribution of income; In real economy, its economic behaviour is the result of some mixture of central control and market determination, with a certain amount of traditional behaviour as well; In practice, every economy is a mixed economy, in the sense that it combines elements of all the two system

Roles of Government in a market economy Providing goods and services streets and highways, education, national defense, security etc; Income redistribution; Ensure and enforce property rights; Regulation of business practices- to encourage competition among firms, consumer safety, controlling pollution etc

Taxation-vital to support its spending programmes; Trade policy- to manage international trade, promoting some types of trade and restricting others

Government intervention in market Equity (fair distribution of society’s resources) Market failure ( a situation in which markets, if left on their own, will fail to generate socially efficient outcomes)

Advantages of free market Automatic adjustment Dynamic advantages of capitalism A high degree of competition (even under monopoly/oligopoly) as a result of: The fear of excessively high profits might encourage firms to attempt to break into the industry Competition from closely related industries Competition for separate control through takeovers

The role of the government in a market economy Deal with problems associated with market failure; Enforces property rights, protecting property and possession from theft, thus encourages production and exchange; Establishes rules for exchange in markets and using its power to enforce the rules; Reducing economic uncertainty and providing for people who are unlucky due to job losses, poor health and other circumstances by safety net.

Drawbacks of government intervention Shortages and surpluses Poor information Bureaucracy and inefficiency Lack of market incentives Shifts in government policy Lack of freedom for individual Government intervention leads to more government intervention