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UNEMPLOYMENT AND INFLATION RATE Essay
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Nov 26th, 2019

UNEMPLOYMENT AND INFLATION RATE Essay

“Official” unemployment refers to the number of civilian workers who are actively looking for work and not currently receiving wages. Given that official unemployment statistics specifically exclude those who would like to work but have become discouraged and ceased looking for employment, the true unemployment rate is always higher than the official rate.In particular, the Phillips curve highlights why this is so. Generally there is a relationship between inflation and unemployment, the lower the rate of unemployment, the higher the rate of inflation.

While a variety of factors can alter the curve (including productivity gains), the essential takes away is that neither a zero unemployment or zero inflation scenario is viable on a long-term basis. By Stephen Simpson Labor is a driving force in every economy, wages paid for labor fuel consumer spending, and the output of labor is essential for companies. Likewise, unemployed workers represent wasted potential production within an economy. Consequently, unemployment is a significant concern within macroeconomics.

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Inflation defines a general increase in the price of goods and services across the economy, or a general decrease in the value of money. Conversely, deflation is a general decrease in the price of goods and services across the economy, or a general increase in the value of money. The inflation rate is determined by observing the price of a consistent set of goods and services over time. In general, the two alternative measures of inflation are headline inflation and core inflation. Headline inflation measures the change in prices across a very broad set of goods and services, and core inflation excludes food and energy from the set of goods and services measured. Core inflation is often used in place of headline inflation due to the volatile nature of the price of food and energy, which are particularly susceptible to supply shocks.The unemployment rate is a vital measure of economic performance. A falling unemployment rate generally occurs alongside rising gross domestic product (GDP), higher wages, and higher industrial production. The government can generally achieve a lower unemployment rate using expansionary fiscal or monetary policy, so it might be assumed that policymakers would consistently target a lower unemployment rate using these policies. Part of the reason policymakers do not revolves around the relationship between the unemployment rate and the inflation rate based from the bar graph above.It is essential to look at the unemployment trends in Malaysia for the period ranging from 2011 to 2014 (Figure 1). By observing the figure, unemployment rate remained moderate at approximate 3 percent. Unemployment rate increases steadily from 2014 to 2018. On the year 2014, the 911 incident, US World Trade Centre was attacked by terrorists (Terence Tai-Leung Chong,2015). This attack marks the beginning of the US economy downturn. It then affects the whole world economy to decline. Being the largest economy in the world, US needs to import tremendously from the rest of the countries. Thus, US economy downturn has decreased its import and the world’s export will decline as well. When the decline of export for the country, it will directly cause the down fall of the country’s economic growth as the productivity has been reduced .Therefore, the global economy will be sluggish. Hence, unemployment rate in Malaysia is 3.4 percent on 2016.Normally unemployment rate in developed countries is higher than developing countries due to higher competition. For example, in the last three quarters of 2013, United Kingdom’s unemployment rate has rose from 7.8% to 7.9% and followed by 8.3% respectively. At the same time, Malaysia’s unemployment rate has went up from 3% to 3.1% and was ranked at 170th place out of 198 countries based on their degree of severity (The Human Resource Ministry of Malaysia and CIA World Factbook, 2012). Observation reveals that youth unemployment rate is even greater than the overall unemployment rate for both of the countries suggesting that youngsters are facing more difficulties in finding jobs as compared to adults. In Malaysia, one of the badly affected sector is the nursing field whereby in 2011, more than 54% of the private nursing graduates were unemployed three to four months after graduating, compared to only 21.7% in 2008 (The Star, 2012). It is a worry situation as fresh graduates find themselves difficult to get employed despite having a solid academic qualification.Unemployment rate has a negative relationship with inflation rate. This is because, according to the Philips curve, the inflation rate has decrease from year 2014 to 2016 when the unemployment rate increases from year 2014 to 2016 and vice verse. This trade-off relationship can be explained by Philips curve. In economics, inflation is known as a rise in the general level of prices of goods and services in an economy over a period of time. When the price level increases, each unit of currency buys fewer goods and services. In short it can be said that inflation is a sustained rise in the general price level. The general price level is a price is something that reflects the overall price level for goods and services in an economy at a particular time. Inflation may cause many negative impacts on economy growth of a country and the country itself. High inflation rate will increase the living cost and the living standards of people in a particular country.A research by Amadeo (2012) found that, inflation is when the price of the most goods and services continue rising upward. This situation may cause the standard of living cost falls because, we have to spend a lot of money to get the same amount of goods and services that we bought previous time. Cheng and Tan (2002) stated that, inflation rate in Malaysia was overcome well in a right way during the financial crisis that faced by the country compared to other countries that faced high inflation during that time. Cheng and Tan (2002) identified that, economically inflation affect many factors and lead to economic problems which can drop the economy growth of a particular country. According to Friedman (1977), he claimed that inflation is always and everywhere a monetary phenomenon where, he said that inflation is a situation which makes the price level to be increased gradually without limitation in a particular country.In general, economists have found that when the unemployment rate drops below a certain level such from year 2013 to 2014, referred to as the natural rate, the inflation rate will tend to increase about 2.1 percent to 3.1 percent from year 2013 to 2014 and continue to rise until the unemployment rate returns to its natural rate. Alternatively, when the unemployment rate rises above the natural rate, the inflation rate will tend to decelerate. The natural rate of unemployment is the level of unemployment consistent with sustainable economic growth. An unemployment rate below the natural rate suggests that the economy is growing faster than its maximum sustainable rate, which places upward pressure on wages and prices in general leading to increased inflation. The opposite is true if the unemployment rate rises above the natural rate, downward pressure is placed on wages and prices in general leading to decreased inflation. Wages make up a significant portion of the costs of goods and services, therefore upward or downward pressure on wages pushes average prices in the same direction.Two other sources of variation in the rate of inflation are inflation expectations and unexpected changes in the supply of goods and services. Inflation expectations play a significant role in the actual level of inflation, because individuals incorporate their inflation expectations when making price-setting decisions or when bargaining for wages. A change in the availability of goods and services used as inputs in the production process (e.g., oil) generally impacts the final price of goods and services in the economy, and therefore changing the rate of inflation. Some researchers have largely upheld the natural rate model while looking at broader changes in the economy and the specific consequences of the 2016-2018 recession to explain the modest decrease in inflation after the recession. One potential explanation involves the limited supply of financing available to businesses after the breakdown of the financial sector. Another explanation cites changes in how inflation expectations are formed following changes in how the Federal Reserve responds to economic shocks and the establishment of an unofficial inflation target. Others researchers have cited the unprecedented increase in long-term unemployment that followed the recession, which significantly decreased bargaining power among workers.According to International Labor Organization (ILO, 2001), unemployed is persons who are above a specified age are without work, currently available for paid employment or self-employment, and actively seeking work. There are three categories of unemployment, which is structural, frictional and cyclical unemployment. Structural unemployment is related to the mismatch in skills, as well as the inadequacy in locations or simply the wrong area desired for work, and interpersonal characteristics. For instance, as the technology is improving and changing in the market often causes many skills possessed to be obsolete. With the advancement of computer many jobs in manual book-keeping have been replaced by highly efficient and handy software. Frictional Unemployment is resulting from temporary transitions made by workers and employers. This type of unemployment occurs when there are fresh graduates trying to enter the job market, searching for job of their choices. Unemployment that is attributed to economic contraction is called cyclical unemployment. The economy has the capacity to create jobs which increases economic growth. When the economy is in recession, firm will reduce production and it lead to the decline of labor demand. Thus, cyclical unemployment will rise sharply during recession.Based on the unemployment movement, the main factors of unemployment in Malaysia caused by the increase in labor costs and lower revenues. It is so hard to imagine that company can survive without incoming prospect of economic stability due to a lot of reason. It is explained in chronology of rising unemployment issues in Malaysia. Because of that problem, they tend to reduce employment to make sure their operation cost not go to high or the least they can do is cut off cost by reducing current employee wages and frozen future employment to retain same productivity and output. The second main factors of unemployment will be the Ringgit Malaysia currency that not stable. Since mega project of 1MDB case hit Malaysia with a lot of rumours, scandal, loss of foreign investment with investor tend to loose their trust on ethicality of Malaysian government in term of transparency and numerous action which hard to be explained, ringgit currency become worse time by time. The USD MYR increased 0.0025 or 0.06% to 4.4275 and historically, the Malaysian Ringgit reached an all time high of 4.71 in recent studies by Department of Statistics Malaysia. According to Wikipedia,the ringgit would experience more acute plunges in the value since mid-2014 through uncertainty of 2015-2016 Chinese stock market crash of turbulence that trigger another plunge in value of Ringgit. Besides that, instability of Donald Trump election by United States political situation that’s not helping at all and USA withdrawal caused high affect of worsen Ringgit currency because China and United States both is Malaysian largest trading partners. Next factors will be the increases of population and growth in Malaysia. This is the only situation where almost every country facing the same problem and Malaysia seriously need to find an alternative to cope with the situation through Islamic and proper management to help economy to enlarge and embark challenges in the future. The increase of population and labor force in Malaysia is conversely not accompanied with job opportunities offer. Studies in 2013 shows that Malaysia Population and growth simultaneously increase to 29.7 million and because of that,development of labor rates has become slow. Through data of world bank, the exact of Malaysian population 30,331,007 and graduates keep increasing looking for a new job so the competition continuously to rise. Furthermore, migration issues of Malaysian to other country and foreign workers coming to Malaysia for work is susceptible for some sectors is highly concerned issues to tackle unemployment problem in Malaysia. Malaysia is very highly needed the workers that have high skilled but Malaysian that study abroad choose to contribute elsewhere make Malaysia have no choice rather than hired foreign too. Even standard of minimum wages set up by Malaysia government currently not match with what neighbour country can offer such as Singapore and Australia and weak of Ringgit volatility causing the problem of wages getting bigger, migration issues is something that cannot be underestimated.Other rising issue of unemployment are mismatch of job opportunities and location of worker. This issue is highlighted by Sahin et al. (2013, p. 1- 8) whereby job location is relating to the planner’s distribution of locations sectors. Another issues of skills and jobs based on the Barnard et al. (2001) cited Rahmah Ismail, Ishak Yussof & Sieng, 2011, p. 6) jobs and skills mismatches occurred when right skills meets job that follows possess skill affect the wages, productivity and probability to get a job. This statement supported by Sahin et al. (2013, p. 6) which only quantifies the number of job-seekers searching in the wrong sector, but not how such misallocation lowers the job-findings rate and raises unemployment.Malaysia’s inflation since 2008 is caused by the oil price shock which is caused by the international commodity prices (such as energy) continued. The fuel price is forced to raise because of the international high price of crude oil which could also be found in other countries such as India. And as a matter of fact, many of us who are working or studying in Malaysia, the raise of price of fuel has been quite obvious in the past few years though such price raise is still relatively under controlled and is slow since Malaysia is a oil producing country and the government is also actively engaging in the oil price control efforts. But nevertheless the gradual and continual increase in the energy price has been pushed up the production cost which contribute to the cost push inflation. Datuk Seri Najib Razak announced on in May 2012 a base wage of RM900 for the peninsula and RM800 in Sabah and Sarawak with a grace period of six months, or double that for micro-enterprises. But Putrajaya’s minimum wage policy will lead to surging unemployment, black market labour and inflationary pressure, employers and economists have warned according to the new reports (Teoh 2012). The minimum wage policy would contribute to the current inflation status in Malaysia in this way: the minimum wage policy would contribute fist to the increase of wages because there is a limit that employers could not spend less than that amount in hiring an employee no matter how low-skill the requirement is. And increased wages spend would definitely push some employers and producers to pass the increased costs to the customers by raising prices and negotiating higher fees for service contracts where they are able to do so (Abbott 2012 p. 58). And obviously these programs would certainly increase the government spending though direct government spending would not account for the whole spending in these programs. And the largely increased government spending would contribute to the inflation in the economy.In term of the demand-pull inflation, with the ongoing trend of globalization and fast development of the emerging economies such as India and China, in addition the economic development is also sustained in the domestic market in Malaysia, all these positive factors have all increased the aggregate demand for the products and goods in Malaysia. And therefore the demand-pull inflation is caused. Below we will talk about another important contributors to the current inflation in Malaysia: the increases in the government spending. In the recent years, the government of Malaysia has been ambitious in government spending to boost the economic development and transformation and its key efforts are known as the Economic Transformation Programme and Government Transformation Programme. The Government Transformation Programme (GTP) is an effort by Malaysia’s current Government to address 7 key areas concerning the people of the country. The programme was unveiled on 28 January 2010 by the Malaysian Prime Minister Najib Tun Razak. and is expected to contribute in making the country a developed and high-income nation as per its Vision 2020. For example, in the beginning of 2011, Malaysian Prime Minister Najib Razak today gave a 100th day progress report on the country’s Economic Transformation Programme (ETP), announcing 19 new Entry Point Projects’ which will contribute RM67 billion (US$21.8 billion) in investment, RM36 billion in Gross National Income and 35,000 new jobs (newasianist.com 2011).

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