unemployment
The Macroeconomic Representation of Unemployment
Explanation of Unemployment Causes by Classical Economics
The unemployment theory of classical economics is based on Say's law
Keynes' explanation of unemployment
Keynes recognized the inevitability of unemployment in capitalist society. In addition to accepting the theory of frictional unemployment and voluntary unemployment in traditional economics, he also proposed the theory of involuntary unemployment . The so-called involuntary unemployment refers to the phenomenon that workers are willing to accept the existing wage level but cannot find jobs . Keynes used the aggregate analysis method, that is, the theory of effective demand, to discuss the problem of involuntary unemployment. The so-called effective demand is the total social demand in which the total supply of goods and the total demand have reached a state of equilibrium; effective demand does not mean that the total social demand is less than the established total supply . Effective demand is composed of consumption demand and investment demand , and it is a key factor determining the total employment of the society. Full employment cannot be achieved when there is insufficient effective demand. Keynes used three basic psychological laws to explain why there is insufficient effective demand, that is, the three basic psychological laws of diminishing marginal propensity to consume , diminishing marginal efficiency of capital , and liquidity preference , which make economic consumption demand and investment demand insufficient. resulting in involuntary unemployment.
The difference between actual aggregate demand AD0 and full employment aggregate demand ADr is the difference in effective demand deficit.
New Keynesian Economics Explanation of the Causes of Unemployment (Inheriting the Inherited Monetary Wage Rigidity Assumption)
Reasons for Wage Stickiness
- Labor Wage Contract Theory: A clause whereby wages increase with rising costs of living and wage rates do not decrease when the economy declines
- Implicit contract theory: A tacit agreement (implicit contract) may be reached between the employer and the employee that the wage rate is relatively fixed and not adjusted with economic fluctuations. Employees are generally risk-averse, that is, willing to work for a company that pays a stable wage.
- Insider-Outsider Theory: Insiders (people who work for a particular firm) Outsiders (people who want to work for that firm)
- Efficiency wage theory: within a certain limit, enterprises can increase labor productivity and obtain more profits by paying employees a higher wage rate than when the labor market is cleared. The rate at which employees leave is called labor turnover . The efficiency wage depends on two factors: the wages paid by other firms and the level of unemployment
Modern Monetarist Explanation of Unemployment (Natural Rate of Unemployment Hypothesis)
The natural unemployment rate refers to the unemployment rate that should be in a balanced state when the spontaneous supply and demand forces of the labor market and the commodity market play a role without the influence of monetary factors, that is, the unemployment rate under the condition of full employment. At any given time, there exists some equilibrium level of unemployment commensurate with the structure of the real wage rate.
Unemployment Effects and Okun's Law
The impact of unemployment
- Unemployment brings material and spiritual negative effects on individuals and families. Unemployment affects income, an individual's physical and mental health, and family prestige.
- Unemployment affects social stability.
- Unemployment affects economic development. Unemployment increases the operating cost of the economy and brings about industrial losses. The rising unemployment rate will also affect the confidence of the whole society and have a negative impact on investment and consumption.
Okun's law
In the economic cycle, there is an inverse relationship between business and output.
If y represents actual GDP, y* represents potential GDP, u represents actual unemployment rate, and u* represents natural unemployment rate, then Okun’s law can be expressed by the following formula:
（y-y*）÷y*=-2×（u-u*）
An important conclusion of Okun's law is: when the DP is fully employed, the real GDP must maintain the same fast growth rate as the potential GDP to prevent the unemployment rate from rising. That is to say, the real DP keeps the unemployment rate at the original level. If the government wants the unemployment rate to fall, the actual DP growth rate of the economy must be faster than the potential DP growth rate.
inflation
Types and causes of inflation
Inflation refers to the general and continuous rise in the price level of an economy within a certain period of time . Specifically, one is that rising prices do not refer to the rising prices of one or several items, but the rising of the general level of prices ; If the increase in the price level is small, even if there is an increase in prices, then it is not called inflation.
type of inflation
Classified by degree of inflation
- Crawling inflation, also known as mild inflation, is characterized by a low and relatively stable inflation rate.
- Accelerated inflation, also known as Mercedes-Benz inflation, is characterized by high inflation rates (generally above double digits) that continue to intensify.
- Hyperinflation, also known as hyperinflation, is characterized by astronomical currency depreciation, price rises like a runaway wild horse, completely out of control, and a monthly inflation rate of more than 50%.
According to the causes of inflation
- Demand-pull inflation, that is, the continuous and significant increase in the general price level caused by the total social demand exceeding the total supply. (to curb the reduction of wages)
- Cost-push inflation, that is, inflation that results from changes in aggregate supply. Due to the rising cost of products, it is an economic phenomenon in which the price level generally rises.
- Structural inflation, that is, price increases caused by excessive demand for products in certain sectors.
cause of inflation
1. Demand-pull inflation
2. Cost-Push Inflation
- wage-push inflation. The belief that excessively high wages will lead to an increase in the general price level.
- Profit-push inflation. In pursuit of more profits.
- Imported inflation, also known as imported inflation, refers to the inflation caused by the rise in the price and cost of imported goods under open economic conditions. In the absence of significant expansion of domestic aggregate demand or money supply, due to the sharp rise in the price of imported raw materials, a chain reaction occurred in the production and circulation fields, thereby driving up prices. The severity of its impact on the domestic economy generally depends on the following factors: ① the gap between international market prices and domestic market prices; ② the proportion of open economic sectors in the overall economy; ③ the sensitivity of domestic policy adjustments and choices.
3. Structural inflation
When aggregate demand and aggregate supply are in balance, prices generally and continuously rise due to changes in economic structural factors. Changes in the structure of demand and differences in the rate of growth of labor productivity across sectors. (Productivity growth in the industrial sector is faster than in the service sector)
4. The Monetarist School’s Explanation of the Causes of Inflation
The relationship between trading volume and money supply: MV=PT
M - money supply
V - Velocity of Money
P - average price level
T - the total amount of transactions of products and services in a certain period of time
The impact of inflation
Inflationary inertia
Once inflation occurs, this inflation will have a continuous trend.
consequences of inflation
1. The social cost of inflation
- The "sole cost" of holding currency. Inflation raises the cost of holding money for consumers and businesses. The higher the inflation rate, the less willing people are to hold money. Inflation increases banks' overhead and operating costs, and creates inefficiencies in real-world transactions.
- The menu cost is also called the cost of adjusting the price. The higher the inflation rate, the more often companies change prices, and the greater their costs.
- Tax distortions due to inflation. The occurrence of inflation will change people's tax burden.
The Economic Effects of Inflation
1. Impact on income and distribution
- Inflation does not favor the classes that live on a fixed income. (Wage earners, public employees, people on welfare, pensions, people on welfare and other transfers) Inflation goes up and real incomes go down.
- Effects of inflation on creditors and debtors. When the inflation rate rises, the interest income of creditors will be damaged, while the debtors will get corresponding benefits due to the lower real interest rate paid. If inflation is high, real interest rates may even be negative.
- The impact of inflation on wealth distribution. Debt will be relatively reduced due to the increase in the inflation rate.
2. The output effect of inflation
- Balanced and expected inflation. Balanced inflation is when the price of each commodity rises in the same proportion. The expected inflation refers to the fact that inflation has been relatively stable for a long time, and the public can basically expect inflation based on experience. The expected inflation is self-sustaining, also known as inertial inflation. Neither real wages nor real interest rates change, nor are output and employment affected.
- Balanced and unexpected inflation. Unexpected inflation occurs when prices rise faster than people expect, or people don't expect prices to rise at all. It takes a process to adjust public expectations after unexpected inflation occurs, thus forming a "time lag". Nominal wages are unchanged, and corporate profit margins are higher, increasing output.
- Unbalanced and expected inflation. Unbalanced inflation refers to inflation in which the prices of various goods in the economy rise in different proportions.
- Unbalanced and unexpected inflation. In the short term, when demand is insufficient and there is idle production capacity in the society, inflation can stimulate investment expenditures of enterprises, expand aggregate demand, and thus stimulate economic growth. In the long run, inflation will increase the risk of productive investment, increase the cost of production and operation, and reduce productive investment, which is not conducive to economic growth.
3. The impact of hyperinflation. lead to economic collapse.
Phillips curve
There is an inverse relationship between the unemployment rate and the inflation rate. In the long run, there is no relationship between the two, that is, no matter how the inflation rate changes, it has no effect on the unemployment rate, and the unemployment rate continues to be at the natural unemployment rate level.
From short run aggregate supply curve to Phillips curve
Derivation of the Phillips Curve
The Role of Expectation Factors in the Phillips Curve
Adaptive Expectations and the Phillips Curve
adaptive expectations
Adaptive expectations mean that when anticipating the value of an economic variable in the future, people will correct the errors in past expectations based on the actual value in the past and the past expectations of the economic variable. People will take the weighted average of the two values to predict the future value , and the setting of the weight reflects the degree of correction of past forecast errors.
An extreme situation when people set weights is that there is no correction for past expected errors, and the weight of all risks is placed on past actual values. That is, the expected future inflation rate is equal to the inflation rate that occurred in the past, that is, the inflation rate of the previous period.
Under such extreme conditions of adaptive expectations, the Phillips curve distinguishes between short-term slope and long-term vertical shapes. The trade-off between inflation and unemployment exists in the short run but disappears in the long run .
short run sloping phillips curve
Assuming that initially people's expected inflation rate is equal to the actual inflation rate, the unemployment rate at this time is the natural rate of unemployment. This negatively sloping Phillips curve only exists in the short run.
long run vertical phillips curve
The vertical line formed by connecting the EAs is the long-term Phillips curve.
Unemployment without accelerating inflation = natural rate of unemployment
Rational Expectations and the Phillips Curve
Rational expectations, also known as expectations consistent with the model, mean that when people predict the future trend of an economic variable, they will use all available information and knowledge to do the best processing to obtain the expected value of the economic variable.
In the case of rational expectations, people's inflation expectations will not be systematically wrong, so the Phillips curve is vertical both in the long run and in the short run. Monetary policy is generally ineffective.
Understanding the Causes of Inflation from the Perspective of the Phillips Curve
- Expected inflation rate. The higher the expected inflation rate, the higher the actual inflation rate. An upward adjustment in inflation expectations leads to an upward shift in the Phillips curve.
- Changes in the unemployment rate. Unemployment falls and inflation rises.
- supply shock. Cost-push inflation. Shown as an upward shift in the Phillips curve.
deflation
Deflation is a monetary phenomenon opposite to inflation, and it is a process of depreciation and appreciation of currency. That is to say, it is when the money supply cannot meet the actual demand for money in circulation or under the influence of other factors that determine the money supply and demand, resulting in a continuous and significant decline in the general price level.
- The overall level of social quality, that is, the overall level of commodity and service prices, has generally and continuously declined.
- The money in circulation is much less than the needs of money circulation, especially the speed of money circulation is reduced.
- Corresponding to the economic process of inflation, deflation tends to occur after inflation is suppressed.
Economic characteristics: prices continue to fall, money supply continues to decline.
Influence
- GDP growth: slowing or even stagnating GDP growth
- Employment: The unemployment rate has risen significantly.
- For import and export trade: the import and export volume has been greatly reduced.
stagflation
Stagflation refers to the coexistence of production stagnation, unemployment increase and high price level in economic life.