Inflation, unemployment, migration

INFLATION

• Inflation is a sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money.
• It is measured by the consumer price index (CPI) and the Bank of England Target is 2%
• Inflation can be caused by external and internal events e.g. from the domestic economy, fluctuations in the ERs, or a raise in VAT.
• There are two main types of inflation
• Demand-Pull inflation - occurs when AD is growing at an unsustainable rate and so there is increased pressures on scarce resources and a positive output gap. When there is excess demand, producers increase their prices to achieve greater profit margins.
• Cost-Push inflation - occurs when businesses respond to rising costs, by increasing prices to protect their profit margins
• Reasons for Demand-Pull inflation
• Depreciation of the exchange rate as it causes AD to increase
• Higher demand from a fiscal stimulus e.g. lower taxes
• Monetary stimulus as a fall in interest rates can cause excess demand
• Fast growth in other countries which provide a boost to UK exports overseas
• Reasons for Cost-Push inflation
• Component costs e.g. an increase in the price of oil
• Rising labour costs due to bargaining power of workers if they expect higher inflation
• Expectations of inflation as workers will ask for higher wages after a sudden increase of the price level (second-round effects)
• Higher indirect taxes increase the costs of production
• Fall in ER

DEFLATION AND POLICIES

• Consequences of inflation are
• Has a regressive-effect on lower income families
• Falling real incomes
• Negative real interest rates as nominal interest rates on savings will be lower than inflation so people who rely on interest from their savings will be poorer
• Cost of borrowing leads to higher interest rates increasing price of debt.
• Risks of wage inflation
• Business competitiveness as trading countries will have lower inflation and so exports will reduce
• Business uncertainty leading to less investment and lower business confidence.
• Winners of high inflation are workers with wage bargaining power, debtors if real interest rates are negative, producers if prices rise faster than costs
• Losers of high inflation are those on fixed incomes, lenders if real rates are negative, savers if real rates are negative and workers in low paid jobs.
• Policies to reduce inflation
• Fiscal policy - controlling AD by using tight fiscal policy, raising direct taxes (so less Yd)
• Monetary policy - involves the central bank using higher IRs, causing ER to appreciate so fall in exported goods therefore contraction in AD
• Supply side - reduce taxes on firms to increase investment, risk-taking, incentives and competition.
• Direct controls - public sector pay freeze, changing the price of some utility bills e.g. water
• Deflation is a persistent fall in a country's general price level
• Many countries in the EU are in a period of deflation
• Causes of deflation are:
• Deep fall in AD / recession (DS)
• Negative output gap (DS)
• Improved productivity (CP)
• Technological advances (CP)
• Fall in wages (CP)
• High ER causing imports prices to fall (CP)

UNEMPLOYMENT

• Those who are unemployed are those people able, available, and willing to work at the going wage but cannot find a job despite and active search for work.
• Means that scarce human resources are not being used to produce goods and services.
• Claimant count (JSA) is the number of people officially claiming unemployment-related benefits and must be actively seeking work.
• Labour Force survey are all the actively seeking and available for work, whether or not they are claiming benefit.
• Economically inactive are people who are those who have stopped an active search for paid work in the labour market.
• Underemployment occurs when people want to work longer hours or are looking for an additional job.
• There are 5 main types of unemployment
• Frictional unemployment - transitional unemployment as people move between jobs. Imperfect information stops people from finding out about jobs & disincentives stop people from looking for new work (unemployment trap).
• Structural unemployment - when there is long-term decline in an industry leading to less demand for labour. Exists when there is a mismatch of skills and requirements for new job opportunities which can be due to occupational and geographical immobility of labour.
• Cyclical unemployment (Keynesian unemployment and Demand-Deficient unemployment) - involuntary unemployment due to lack of demand for goods and services. Occurs usually during a recession or fall in growth (but does not have to) and when there is a negative output gap.
• Technological unemployment - the way in which productivity-enhancing innovation displaces workers and creates periods of higher unemployment
• Long term unemployed - those who have been out of paid work for at least one year. After a long period of unemployment, skills decline and so they become less attractive to employers.

REDUCING & RISKS OF UNEMPLOYMENT

• Effects of unemployment
• Loss of income therefore meaning less Yd and lower living standards
• Risk of deflation due lower AD and more deflationary pressures
• Negative multiplier effects e.g. one company closing down can have effects on other industries. Causes a loss of potential national output and waste of scarce resources.
• Fiscal costs causes fall in tax revenues and higher spending on welfare payments resulting in a budget deficit.
• Social costs as unemployment can be linked to social deprivation and social dislocation as there will be a widening of inequality of income and wealth.
• Outward migration leading to loss of skills, labour force and decrease in productive potential.
• Youth unemployment can be caused by skills gaps, reluctant employers, falling retirement rates, weak macro fundamentals.
• Policies to reduce unemployment
• Reducing occupational immobility by increasing training, apprenticeships schemes, improving incentives to work.
• Reducing the geographical immobility of labour so that they can move to areas where there are jobs available.
• Benefit and tax reforms will cause the amount of unemployment benefit to decrease which will increase the incentive to work. Lower marginal tax rates will increase incomes for the unemployed.
• Increasing AD by increasing investment, lowering taxes to create new jobs.
• Subsidies and/or tax cuts for employment to increase incentive and lower the costs for business who cannot afford to take on new jobs

LABOUR MIGRATION

• Benefits of migration
• Provide fresh skills and higher labour productivity
• Increase in thesis of at the active labour supply
• Driver of innovation and entrepreneurship
• Positive multiplier effects if migrants find paid work
• Reducing skilled labour shortages in industries
• Remittances send home can add to GNI of home nations - creating more exports
• Arguments against migration
• Welfare costs: increase in cost of providing public services
• Possible displacement of domestic workers
• Social tensions from integrating communities
• Rising demand for house prices causing price to increase
• A brain drain is when the highly skilled or professional people from their own country to another country where they can earn more money (capital flight). Means there is a loss of tax revenue and labour shortages.