Relationship Between Inflation and Unemployment in India PDF
Relationship Between Inflation and Unemployment in India PDF
Relationship Between Inflation and Unemployment in India PDF
Q. There is a strong relationship between unemployment and inflation. India's situation is different.
Discuss.
A.
Unemployment Rate
The labor force is defined as the number of people employed plus the number unemployed but seeking
work. The unemployment level is defined as the labor force minus the number of people currently
employed. The unemployment rate is defined as the level of unemployment divided by the labor force.
If rate of inflation increases suddenly, it temporarily reduces, the rate of increase in the wages.
Consequently, unemployment rate decreases. If the workers are able to cope with the increase in
inflation, unemployment rate is also less. However, when they do realize that in order to compensate
for the increase in price of commodities, the wages ought to be increased, unemployment may rise to a
Economic and Social Environment
considerable extent. This increase in the demand of wages, has a tendency to reverse the
unemployment
mployment curve to some extent (unemployment rises). If the rate of inflation is very high, it does
not mean that, there will be a permanent decrease in the rate of unemployment. As a rule, rate of
inflation and unemployment adjust themselves to attain the equilibrium state, which is known as the
natural rate of unemployment state, effortlessly.
The changes in govt policies had an impact the Phillips curve, an example below illustrates this
Economic and Social Environment
Unemployment
If the Govt. INCREASES the benefits they pay to the If the Govt. DECREASES the benefits they pay to
unemployed/underemployed in general this the unemployed/underemployed in general this
produces a higher level of FRICTIONAL produces a lower level of FRICTIONAL
unemployment. People tend to stay unemployed unemployment. People tend to stay unemployed
for longer periods of time because the for shorter periods of time because the
replacement income they receive from the govt. is replacement income they receive from the govt. is
closer to their lost income…In other words, the much LESS then their original income…In other
incentive to look for a Job is diminished and the words, the incentive to look for a job is INCREASES
tendency to stay unemployed increases.. and the tendency to stay unemployed
The LONG RUN PHILLIPS CURVE SHIFTS TO THE DECREASES...
RIGHT The LONG RUN PHILLIPS CURVE SHIFTS TO THE
LEFT
Some economic studies suggests that the Phillips curve is nonexistent in India. This study finds that
supply shocks, namely droughts and oil crises, and the liberalization-policy shock of the early 1990s are
the main reasons for the absence of the Phillips curve in India
Stagflation
Stagflation is an economic situation where the growth rate slows down, unemployment levels remain
steadily high & inflation also stays high. Stagflation, a concept which did not gain acceptance till the
1960s, is described as a situation in the economy where the growth rate slows down, the level of
unemployment remains steadily high and yet the inflation or price level remains high at the same time.
At the first instance, high inflatio
inflation
n and unemployment or slower growth seem like opposites and
mutually exclusive.
At the latest policy meeting on 16 September, the Reserve Bank again hiked rates by another 25 basis
points with the goal of licking
king inflation. But the RBI ought to realize that at some point high interest
rates will lead to high inflation. Also the time has come for the Indian government to take some action
as the RBI alone cannot solve the multi
multi-year, fiscal deficit-triggered problem
blem of inflation.
Economic and Social Environment
High inflation and a slowdown create a vicious stagflationary circle that's difficult to break. Corporate
are already complaining that the continued increase in interest rates is slowing growth. Slow growth
negatively affects the supply of goods and services. This in turn pushes the prices up, leaving inflation
stubbornly high.
In India the interest rates of savings have dramatically gone up over the past several months. This by
itself increases money supply by putting more cash in the hands of individuals increasing demand for
goods and services, which pushes up prices. In a scenario where output of goods and services slow
down, higher demand only increases inflation.
For ages RBI has been trying achieve price stability by targeting demand. It does this by manipulating
money supply. Hence to increase demand it reduces interest rates and increases money supply.
References
http://www.tradingeconomics.com/unemployment-rates-list-by-country
http://www.forbes.com/sites/advisor/2011/08/26/stagflation-is-knocking-on-the-door/
http://faculty-web.at.northwestern.edu/economics/gordon/ARNfull.pdf
http://www.indianexpress.com/news/cut-policy-rates-to-reduce-inflation-basu/849484/0
http://www.thehindubusinessline.com/opinion/columns/p-v-
ndiresan/article2479811.ece?homepage=true