1. UNEPLOYMENT OR INFLATION
REAL ALTERNATIVE?

2. UNEMPLOYMENT
 Definition – unemployment is an economic phenomenon that
people who want to work and are able to work cannot work
because of the shortage of work (job places)
 Unemployment rate = rate of the unemployed to the total labor
force (U)
 Labor force: the employed + the unemployed (LF)
 The key issue is how to count the unemployed
 Registered unemployed – those who are registered at labor
offices or in the other way officially
 The unemployed – based on survey of economic activities of
population: those of the adult population who did not work even
single day in the proceedeng month
 The unemployment rate depends on the definition of the
unemployed

3. Manipulations with
unemployment rate
 We can increase the base (labor force) by adding certain groups
to the labor force ( M. Tatcher, adding entrepreneurs to the base)
 We can demotivate people to register (distant labor office, lot of
formalities)
 We can decrease unemployment benefits to demotivate people
to register for benefits
 We can make people ashamed to tell the survey officers that they
had not earned any money in the last month
 Conclusion – the unemeployment rate can be maniputaled but
the real problem remains : there are people who cannot really
find jobs accordingly to their residence location and
qualifications
 Employment rate - percentage of the employed to the
population aged 18-64 in EU (it differs from country to country)

4. Labor Force Survey LFS
 (LFS), which covers persons aged 15 and more, members of households in
dwellings selected on a random basis. The survey is conducted by the continuous
observation method, i.e., economic activity of the population is observed in each week
during the whole quarter. Since the I quarter of 2003, data of the LFS have been generalized
on the basis of the balance of population compiled with the use of the results of the
Population and Housing Census 2002. Data presented by age groups have been calculated
on the basis of the exact date of birth, until the I quarter of 2006 — with the exception of
persons aged 15 — they were presented according to the year of birth.
 The main criterion in dividing the population into economically active (employed and
unemployed persons) and inactive is work, i.e., performing, holding or looking for
work.
 Employed persons are persons who during the reference week:
— performed, for at least 1 hour any work providing earnings or income, or assisted (without
wages or salaries) in maintaining a family-owned farm in agriculture or conducting a
family-owned business outside agriculture,
— formally had work but did not perform it (e.g., due to illness, vacation, a break in company
activity, bad weather); if the break in work exceeded 3 months, since 2006 the additional
criterion in case of paid employees (employees hired on the basis of an employment
contract and outworkers) was the fact of receiving at least 50% of the hitherto
remuneration.

5. LFS cont.
 Unemployed persons are persons aged 15—74, who
simultaneously fulfil three conditions:
— within the reference week were not employed,
— actively sought work, i.e., within a 4-week period
undertaken any real action (the last week being the
reference week) to find work,
— were available for work within a fortnight period following
the reference week.
 The unemployed also include persons who have found work
and were waiting to begin it within a 3-month period, as well
as persons who were available for that work.
 Economically inactive persons are persons who are not
classified either as employed or unemployed.

6. Employment rates in Europe
Source: Eurostat

7. Unemployment rates in Europe
Source: Eurostat

8. Hours of work weekly
Source: Eurostat

9. TYPES OF UNEMPLOYMENT
Frictional Unemployment:
- is caused by imperfect information and frictions in the economy
- employers are not aware of all available workers and their
qualifications, and,
- available workers are not fully aware of all the jobs being offered
by employers.
- some people change jobs and are temporary unemployed
Structural Unemployment:
- caused by an imperfect match of employee skills to skill
requirements of the available jobs.
Cyclical Unemployment (Keynesian):
- caused by changes in economy due to the business cycle conditions
- in the recession cyclical unemployment increases.
Classical unemployment:
- caused by too high level of working compesation above the level of labor
market equilibrium

10. CLASSICAL VS KEYNESIAN
UNEMPLOYMENT
Source: http://www.s-cool.co.uk/alevel/economics/unemployment-and-the-phillips-curve/unemployment--the-details.html

11. Natural rate of unemployment
 The Natural Rate of Unemployment is the rate of Unemployment when the Labour
market is in equilibrium.
 It is the difference between those who would like a job at the current wage rate and those
who are willing and able to take a job.
 The Natural Rate of Unemployment will therefore include:
 frictional unemployment
 structural unemployment
 E.g. a worker who is not able to get a job because he doesn’t have the right skills
 The natural rate of unemployment is unemployment caused by supply side factors rather
than demand side factors
 Monetarists argue that the Natural Rate of Unemployment occurs when the Long Run
Phillips Curve crosses the x axis
 The Natural Rate of Unemployment is sometimes known as the
Non accelerating inflation rate of Unemployment NAIRU
This is because when unemployment is 4% there is no tendency for inflation to increase
 In this example the Natural rate of unemployment is 4%. If the govt increased AD there
may be a temporary fall in unemployment but in the Long Run it would return to the
natural rate of 4%
 Sometimes the natural rate is known as the full employment level of unemployment
 This is because even if the economy is operating at full capacity and there is no demand
deficient unemployment then there will still be some unemployment caused by supply
side factors.
Source: http://www.economicshelp.org/macroeconomics/unemployment/natural_rate.html

12. Natural rate of unemployment
Source: http://tutor2u.net/economics/content/topics/unemp/natural_rate.htm

13. Original Phillips curve

14. Theoretical Phillips curve

15. NAIRU
non-accelerating inflation rate of unemployment

16. NAIRU
 The NAIRU concept maintains that when unemployment is at the rate
defined by the red line, inflation will be stable. However, in the short-
run policymakers will face an inflation-unemployment rate tradeoff
marked by the "Initial Short-Run Phillips Curve“. Policymakers can
therefore reduce the unemployment rate temporarily, moving from
point A to point B through expansionary policy. However, according to
the NAIRU, exploiting this short-run tradeoff will raise inflation
expectations, shifting the short-run curve rightward to the "New Short-
Run Phillips Curve" and moving the point of equilibrium from B to C.
Thus the reduction in unemployment below the "Natural Rate" will be
temporary, and lead only to higher inflation in the long run.
 The name "NAIRU" arises because with actual unemployment below it,
inflation accelerates, while with unemployment above it, inflation
decelerates. With the actual rate equal to it, inflation is stable, neither
accelerating nor decelerating. One practical use of this model was to
provide an explanation for stagflation, which confounded the
traditional Phillips curve.

17. Inflation vs. Unemployment
criticism
 Coincidence or cause-effect relationship
 Naive concept within the complex economic world
 Pretext to expand expenditures or money supply
 With context to the Long Run Phillips Curve was the Short
run only the coincidence?
 Do LPC really exist?
 Polish research in 90’ shows that the higher public deficit
the lower growth rate and higher U– it is totally opposite to
theory
 It seems that different factors influence inflation and
unemployment

18. Costs of unemployment
 Social (margin, crime, etc.)
 Individual (psychological)
 Consumer pesimism (can cause the spiral of
stagflation)
 To GDP (Okun law – when U grows by 1% over natural
unemployment rate the GDP falls by 3 %)
 Other costs
 Think: who benefits from unemployment

19. Costs of inflation
 Loses of cashholders
 Loses of institutional creditors
 Loses of bonds holders
 Loses of employees and entrepreneurs
 Loses of taxpayers
 Loses of pensionaires
 Think: who benefits from inflation?

20. Fisher law
MV = PQ
where:
 M – money supply
 V – velocity of money
 P – price level
 Q – the quantity of goods and services
When V and Q are constant in the short run then
P depends on M

21. Fisher law conclusion
 The price level depends on the quantity of money in
circulation and money supply decides on inflatioon
 This approach dominates in economics and influences
the moderation in money supply

22. Doubts?
 Can the central bank influence the money supply in the
fixed exchange rates environment?
 Is money supply shaped by export surpluses of certain
countries and the central bank must exchange foreign
curriencies into the domestic money on demand ?
 Can shortterm employees’ transfers function in the similar
way as export surpluses?
 Can inflow or outflow of foreign investment will not
influence the money supply instead of the central bank?
 Conclusion: in the small open economy the central bank
has a limited opportunity to control money supply.

23. Types of inflation
 Cost pushed
 Demand driven
 Structural