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 costsLosers 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.