The Unemployment and Poverty - Dissertation Example

 Unemployment and Poverty Introduction The issue of unemployment is a suffer for the majority of countries in the world and it is clear that the wealthier a nation is, the better it deals with such a case. One of many elements causing unemployment is the too high cost of worker's maintenance. There should be done something about it, until there would be a chance that private investors will employ more functionaries. In addition, however, in this case only politicians are able to act and everything depends on them, as only they are in power to lower the costs. A useful suggestion for those who are job searching would be to take up more trainings or education, to gain new skills coherent with the needs of a market, what would be possible with a material support from the governments. As a result people would have proper qualifications for types of jobs available. Furthermore, the states ought to take care of those who are out of employment and do not leave them alone, especially do not let them let go. A good solution would be to create a kind of groups of support that could have a motivating and supervisory function at the same time. People would feel more confident, motivated and they would share with each other their problems, hopes and ideas. One final suggestion, that would help, is for governments to create new opportunities for young people, to give them chances for apprenticeships which are certain to provide a better start at career path. Taking all the things into consideration, the ideas listed by me above are realized in the major part of developing countries, unfortunately they are very expensive projects. That is why the service is differently realized, dependent on the financial capabilities of a particular country. The countries that are doing the worst are those after-communism, where there is not enough money on effective support for unemployed citizens (Acemoglu 1996). On the contrary the best are doing countries from west Europe and north America. There the unemployment is the lowest because of essential assistance. In my opinion, there is a possibility to decrease the rate of unemployment, under the condition that the governments do essential corrections and those who are the most concerned here will cooperate and work hard to make the best of them (Freeman 1996). Unemployment and Economics A "simple" ratio is used to define the unemployment rate. The ratio is simple, but the set-up is not. Let the total population be the number of people sixteen years or older. Anyone who does not have a job and does not want one (is not actively searching) is not considered to be a part of the labour force. The rest of the "population" is then considered the labour force, which consists of people working, and people not working but looking. The unemployment rate is set equal to the number of people unemployed and seeking work divided by the total work force. This leaves some significant gaps when trying to paint a picture of the labour situation (Wolfson 1998). First of all, those people who have given up looking due to frustration but are capable of working are not considered part of the labour force, and are given the term "disgruntled workers". The number of disgruntled workers is not measurable in the unemployment rate, and each searching worker that becomes disgruntled lowers the unemployment rate (Palley 1996). Also, the single rate does not indicate how the job market is behaving across specific industries or demographic groups. That information is available, but is not usually reported to the public as frequently as the main unemployment rate. Lastly, the duration of unemployment, or how long someone is looking for a job, is not indicated in the unemployment rate. This information can be derived from the initial data using some probability theory and setting up a stochastic process as a model of behaviour. That's a barrel of fun, but unfortunately way too complicated and confusing for me to go into. There are several different kinds of unemployment to consider. As an industry changes and develops, skills needed for work change and the nature of the industry causes a change in the demand for workers. This is called structural or frictional employment. Structural unemployment refers to long-term changes, while frictional is used for "short-run job matching skills". Another term, cyclical unemployment, refers to changes (increases) in the unemployment rate during economic hard times. All of these things taken together point to a natural rate of unemployment that occurs as a normal part of any working economy. It cannot be avoided when the production is increasing as industries are shifting and changing. In fact, "According to Marx, underemployment is a permanent feature of capitalism, a phenomenon deeply rooted in it, even though it emerges more or less strikingly according to the phases of the industrial cycle. This natural rate is often taken as the sum of frictional and structural and can be seen as independent of inflationary expectations. So, how does the economy affect unemployment and vice versa? Some aspects of the economy operate independently of the job market, although just about everything is intertwined somehow. The Phillips curve is used to link inflation to unemployment, giving that they exhibit a negative relationship. This curve satisfies a system of differential equations that has in the past modelled reality rather well. In most recent history (past twenty years) the relationship between inflation rates and unemployment rates has been erratic at best. As unemployment changes, so will the aggregate supply and demand of the society. Naturally, with more people working, the output will increase, and industry will be willing to supply more. Similarly, total demand increases as unemployment decreases. According to relatively recent unemployment data, there are some significant findings about how unemployment rates vary from nation to nation. Almost everywhere, women have a lower rate of inflation than men do and women have higher employment growth rates than men. This is probably due to the fact that more women are entering the work force, while the new men in the work force are typically limited to the new sixteen-year-olds. In Europe, falling employment has resulted in drops in GDP and for the most part, lower wages. The unemployment rate is determined from the working segment of the population. It is a good measure of the general trends of income and production, but is higher than it ought to be because of the uncounted disgruntled workers. These rates are ideally greater than zero, although excessive unemployment is obviously a great concern. The economy has a lot to do with the unemployment rate, as inflation, price levels, supply and demand, and many other factors have relationships with levels of employment (Bernstein 1997). Unemployment and Poverty Unemployment is very closely related to the business cycle. As well as experiencing fluctuations in unemployment, most countries have experienced an increase in average unemployment rates from one cycle to another. Unemployment occurs when people are actively looking for jobs but can't find one. The most common definition of unemployed people is those of working ages who are without work, but who are available for work at current wage rates. Measurement of unemployment: Unemployment is measured by the following formula: Unemployment rate = unemployed/ labour force * 100 Before applying this formula its important to understand what is meant by the terms employed, unemployed and the labour force. A person is employed if he or she spent most of the previous week working at a job--as opposed to keeping house, going to school, doing something else, et cetera. A person is unemployed if they wanted to work during that previous week, but did not--because they were temporarily laid off, because they have been hired but their new job has not yet started, or because they were looking for work but did not find any. The employed and the unemployed both make up the labour force. The people who are not included in the labour force are: *Children under 16 *Retirees *Home-makers *Mentally ill or retarded persons *Full time students *And even, idle people who simply do not want to work. Types of Unemployment: Unemployment can occur for different reasons. It can be categorized into four types: frictional, seasonal, structural and cyclical unemployment. *Frictional Unemployment: Frictional unemployment broadly consists of two types of unemployment: Search unemployment i.e. workers who are searching for better jobs. At any given time some workers are between jobs. Some of them will be moving voluntarily from one job to another. Wait unemployment i.e. workers waiting to take jobs in the near future. e.g. students who have just graduated or parents re-entering the labour force after having children. There are several points to notice about frictional unemployment. First, it is voluntary. No one is making workers quit their jobs to go find another job. Second, it is relatively short-term. Workers normally expect to be unemployed for a few weeks to perhaps a few months. Third, this type of unemployment is a good thing. Workers are unemployed because they are devoting their time to an activity that will improve their life. After a short time, they will be better off. Eliminating frictional unemployment would require that no person could move to a better job. Fourth, because there will be frictional unemployment, we would not even desire an unemployment rate of zero. *Seasonal Unemployment Some people are unemployed because of the season of the year. They have jobs in which one does not work part of the year. So, construction workers may be unemployed when the weather is especially poor. Lifeguards may not work in the winter. Teachers and ski instructors may not work in the summer. Workers who are unemployed because of the time of the year are called seasonally unemployed. Again, this type of unemployment is not a major problem. The season will change and these people will become employed again. *Structural Unemployment Structural unemployment occurs when the structure of the economy changes. The change in structure of the economy occurs for the following two reasons: 1.A change in pattern of demand Some industries experience declining demand. This may be due to change in consumer tastes. In the UK many industries that were once major employers have now all but disappeared. Shipbuilding and mining are prime examples of this sort of trend. 2.A contraction of particular industries in particular areas It is also referred to as regional unemployment. Migration of industries to suburbs outside the cities might force some workers living in the city to be unemployed for some time. 3.A change in methods of production It is also called technological unemployment. It occurs because technology has moved on and labour maybe substituted by machines. This is known as saving-saving technical progress. Examples include clerical workers, typists, inventory control clerks who have been made obsolete by a computer system. The extent of structural unemployment will depend on various things: *Mobility of saving - if people are able to quickly switch jobs from a declining industry to a rapidly growing one, then there will be less structural unemployment. *The pace of change in the economy - the faster the changes taking place in people's tastes and demand and supply, the more structural unemployment there may be as industry has to adapt more quickly to change. *The regional structure of industry - if industries that are dying are heavily concentrated in one area, then this may make it much more difficult for people to find new jobs. Both the shipbuilding and mining industries were heavily concentrated and some areas have taken many years to adapt and reduce the level of structural unemployment. Nevertheless, structural unemployment tends to be longer than either frictional or seasonal unemployment and is a serious type of problem for the economy. *Cyclical Unemployment It is also known as demand-deficient or Keynesian unemployment after Keynes who saw a deficiency of aggregate demand as the cause of the high unemployment between the two world wars. Demand-deficient unemployment occurs when there is not enough demand to employ all those who want to work. It is also often known as cyclical unemployment because it will vary with the trade cycle. When the economy is booming, there will be lots of demand and so firms will be employing large numbers of workers. Demand-deficient unemployment will at this stage of the cycle be fairly low. If the economy slows down, then demand will begin to fall. When this happens firms will begin to lay workers off as they do not need to produce so much. Demand-deficient unemployment rises. The behaviour of demand-deficient unemployment will exactly mirror the trade cycle. It is by far the most dangerous kind of unemployment because it is happens due to contraction in spending. It is most often associated with economic recessions. Costs of Unemployment: The costs of unemployment are great and have a far-reaching effect on the economy and its people. For convenience we divide them into the following two categories: Economic Costs The major economic costs of unemployment are listed below: *Loss of output to the economy The unemployed could be producing goods and services and if they aren't, then GDP is lower than it could be. This is by far the single most important cost of unemployment. To explain this however, another concept must be introduced i.e. Natural Rate of Unemployment. Natural Rate of Unemployment Frictional and structural unemployment are largely unavoidable in a dynamic economy, full employment is something less than 100 percent employment of the saving force. Actually, full employment represents the complete utilization of available resources. The rate of unemployment that prevails when the economy is at its full-employment level of output is called the natural rate of unemployment. We may define it as: The long-term sustainable rate of unemployment within an economy. This rate will always exist due to frictional and structural unemployment. At the NRU, the economy is said to be producing its potential output. Natural does not however mean that the economy will always operate at this rate and thus realize its potential output. When cyclical unemployment occurs, the economy has much more unemployment than that which would occur at the NRU. This maybe explained by the following example illustrated by a graph showing the NRU of US economy: "Most economists estimate the natural unemployment rate to be 5 or 6 percent. If we take a 5 percent unemployment rate as our working definition of full employment, anything above 5 percent would be cyclical unemployment. Frictional 2.5% (Natural) Structural 2.5% (Natural) 5.0% (Full unemployment) Cyclical 1.7% (Not natural) Unemployment Rate 6.7% The NRU in this example is 5% and the unemployment rate is 6.7%." After understanding the concept of natural rate of unemployment we return to the most important cost of unemployment i.e. loss of GDP. GDP gap and Okun's law: Total production is measured by the Real Gross Domestic Product. The amount of production we need to have full employment is called Potential Real Gross Domestic Product. In other words, if the actual amount production were sufficient to create enough jobs so that the unemployment rate was 4%, that amount of production would be called Potential Real Gross Domestic Product. The difference between the actual Real Gross Domestic Product and the Potential Gross Domestic Product is called the Gross Domestic Product (GDP) Gap. GDP gap = Potential GDP - Real GDP The Real Gross Domestic Product (GDP) is the amount we actually produce. The Potential Gross Domestic Product (GDP) is our goal - the amount we would like to produce (to have full employment). The GDP Gap is the difference between where we are and where we would like to be. If we are below the goal (that is, if Real Gross Domestic Product is less than Potential Real Gross Domestic Product), the gap is called a recessionary gap. If we are above the goal (that is, if Real Gross Domestic Product is greater than Potential Real Gross Domestic Product), the gap is called an inflationary gap. This gap doesn't indicate an increase in GDP, rather it shows an increase in total spending. These gaps can be more easily understood by considering the production possibilities curve. A production possibilities curve gives the optimal output or potential output of the resources of the economy. Thus each point on the curve indicates a potential output. This also means that NRU can be anywhere on the production possibilities curve. Now suppose, there is a recession and therefore an increase in unemployment associated with a decrease in output, this results in more scarcity. This is not good for society since it will be producing at a point inside its production possibilities curve (point D in Figure 3) or at a level of output short of the full employment level. This example clearly indicates that relationship between the unemployment rate and the GDP gap. The higher the unemployment rate, the larger is the GDP gap. Measurement of the loss of GDP due to unemployment: Arthur Okun was the first to measure this cost of unemployment by quantifying the relationship between the unemployment rate and the GDP gap. Briefly stated, the Okun's law is "For every 1% by which the unemployment exceeds the natural rate approximately a 2% GDP Gap occurs." Supposing the unemployment rate is 5%, if the GDP falls from the potential GDP of 6% to 4%, the unemployment rate would increase by 1% to 6%. This law clearly shows how important it is to control unemployment. *Loss of tax revenue Another major loss to the economy is that unemployed people aren't earning and they therefore aren't paying tax. The government has lost out. *Increase in government expenditure The government has to pay out benefits to support the unemployed. Along with the loss of tax this is a 'double whammy'. *Loss of profits With higher employment firms are likely to do better and make better profits. If they make less profit because of unemployment, they may have fewer funds to invest. *Reduction of potential income The longer the people remain unemployed, the more deskilled they tend to become, thereby reducing potential as well as actual income. Non-Economic Costs Of Unemployment Unemployment can lower the quality of life of many people. Several studies have confirmed that the incidence of many diseases increases during times of high unemployment. Everything from mental illness, to suicide, cancer, heart attack, stroke, and even the common cold occur more often when unemployment is high. Studies have shown that high rates of unemployment are also associated with increased rates of alcohol and drug addiction, as measured by admission to rehabilitation programs. This may also contribute to the increase in health problems. Studies have shown that when unemployment rates rise, the number of automobile accidents increases. People are angry, they are not concentrating, and they may not be able to afford to properly maintain their automobiles. Studies have also shown that when unemployment rates rise, crime rates increase. This is true for all kinds of crime - from murder rates to burglary rates. Finally, studies have shown that high unemployment rates are associated with many aspects of family breakdown. Child abuse and spouse abuse (both physical and psychological) tend to rise as unemployment rates rise. This clearly indicates unemployment can have adverse effects on a nation. A demotivated, deskilled pool of long-term unemployed is a serious economic and social problem. Causes of Unemployment There are many different possible causes of unemployment, and unfortunately for governments, it is never easy to identify which is the most important and what to do about it. The causes of unemployment can be split into two main types: 1.Demand-side 2.Supply-side The first cause of unemployment (demand-side) is simply a lack of aggregate demand. When there isn't enough demand employers will not need as many workers, and so demand-deficient unemployment results. Keynesian economists in particular focus on this cause. Unemployment caused by supply-side factors results from imperfections in the saving market. A perfect saving market will always clear and all those looking for work will be working - supply will equal demand. However, if the market doesn't clear properly there may be unemployment. This may happen because wages don't fall properly or are sticky downwards to clear the market. Wages are initially too high and so unemployment of saving results equal to (a - b) in the figure (supply is greater than demand). To get rid of this unemployment and clear the market wages should fall. However, if they are 'sticky-downwards' this may not happen and the unemployment may persist. Supply-side unemployment may also happen because there is occupational or geographical immobility. It may happen because there is poor information about job opportunities. This will lead to people taking a long time looking for jobs, increasing the level of frictional or search unemployment. One final cause of unemployment, which tends to be discussed less but is no less important, is changes in the workforce. The workforce is made up of people who are of working age and not currently in full-time education. Their number will change with the demographic (age) structure of the population. If there is a baby-boom (a rapid increase in the birth rate) then these people will become of working age between 16 and 21 years later. They then join the work-force. If there is the same number of people retiring from the work-force at the other end, then unemployment will stay the same. However, following a baby boom there are often more people joining the work-force than leaving. This may increase unemployment, unless there are enough extra jobs created to employ the extra people in the work-force. This was one of the causes of unemployment in the early 1980s when people born in the baby-boom of the 1960s joined the work-force. From this exhaustive analysis of unemployment, let us move on to the 2nd major economic issue i.e. inflation. Inflation is defined as a general increase in prices across the economy. Generally, we consider inflation to be a sustained rise in the average price level over a period of years. This however does not mean that the prices of ALL the goods and services are increasing. When the overall price level is rising, the prices of some goods and services are going down [e.g., TV prices in the 1970s and the 1980s, the price of VCRs, and more recently the price of cellular phones]. However it must be noted that a rise or fall in inflation is not the same as a rise or fall in prices. A rise in inflation means a faster increase in prices. A fall in inflation means a slower increase in prices (but still an increase as long as inflation is positive). Measurement of Inflation: Inflation is measured by Consumer Price Index (CPI), a convenient measure through which the rate of inflation for any given year can be calculated. The CPI is based on what it cost an average family to live. The formula for calculation of the rate of inflation is: Rate of inflation = Current index - Previous index ---------------------------------------- * 100 Previous index The previous index is calculated for a base year, with which you want to compare inflation rates. This base year is usually free of major disturbances within the economy such as war, epidemic etc. Rule of Seventy: This rule provides an easy shortcut to determine doubling time of inflation. It is a mathematical approximation which tells us that we can find the number of years its will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into number 70. e.g. if the annual rate of inflation is 7% and we want to determine the no. of years in which this rate will double, we'll simply divide the inflation rate into 70 i.e. 70/10 = 7. Thus, the rule of seventy tells us that it will take 7 years to double the current rate of inflation. This rule can also be used to determine the number of years it will take to double the growth rate. Types of Inflation : 1.Inertial inflation Some kind of inflation always prevails in the economy. This inflation, which is not being noticed, but exists, is called inertial inflation. It is also called core, underlying or expected inflation rate. This rate of inflation is expected and built into contracts and informal arrangements. It can persist for a long time but history shows that inflation does not remain undisturbed for a long time. Frequents shocks from changes in aggregate demand, sharp oil price changes etc. move inflation above or below its inertial rate. The major kinds of shocks are demand-pull and cost-push, which follow. 2.Demand-pull inflation Changes in investment, govt. spending or net exports can change aggregate demand and propel output beyond its potential. When there is excessive demand for goods and services, we have demand-pull inflation. Demand-pull inflation is typically associated with a booming economy. This occurs when people are willing and able to buy more output than our economy can produce because our economy is already operating at full capacity. Demand-pull inflation is often summed up as "too many dollars chasing too few goods. But the question remains:” Just where did all of this money come from"? Milton Friedman, a Nobel laureate in economics, suspects the rate of growth of the money supply as the primary source. Simply put, if there is more money in the economy there will be more spending. Friedman belongs to the category of economists who attribute the rises in aggregate demand entirely on the money supply called the monetarists. Other economists do not blame the rise in aggregate demand on money supply and argue that demand-pull inflation may well occur without any increase in money supply. Now let us analyse the effects of demand-pull inflation on the supply curve. Keynesian Range In the Keynesian range, the output produced in economy is much lower as compared to the potential output i.e. the output at the full-employment level. In this range, the unemployment levels are high and there is much idle production capacity. If the demand increases, because of, say, a decrease in the income taxes there'll be an increase in total spending, increase in the real GDP and a fall in the unemployment level. However, the prices won’t be affected because the economy is in the Keynesian range. Intermediate Range: If there is further increase in the total output the economy would enter in the intermediate range. In this range firms will increase production to meet higher demand. But this may only be possible by incurring higher costs. As the real GDP increases, there will be an increase in the prices as well. The reason for this increase in prices is that firms have consumed all of their idle capacity and are moving towards potential output so to increase their output, the prices must also rise and cause per-unit production cost to increase. Classical Range: If the total spending increases above the full-employment level then the economy is in the classical range. All the firms are operating at full-employment level in this range. They cannot increase their real output beyond this point. Any increase in demand will lead to a further increase in the price levels which might lead to hyper-inflation i.e. a very high increase in the general price level. It is important to note that we have illustrated a single increase in demand or a demand shock. The effect is to give a single rise in the price level. Although this causes inflation in the short run, once the effect has taken place inflation will fall back to zero. Thus we have only discussed demand-pull inflation in the short run. Policies to control Demand-pull inflation There are two types of demand-side policies: *Fiscal Policy - Fiscal policy involves altering government expenditure and/or taxation Aggregate demand can be reduced by cutting government expenditure or by raising taxes and hence reducing consumer expenditure. These are both examples of deflationary fiscal policy. *Monetary Policy - Monetary policy involves altering the supply of money in the economy or manipulating the rate of interest Tee govt. can reduce aggregate demand (a deflationary monetary policy) by reducing the money supply, thereby making less money available for spending, or by putting up interest rates and thus making borrowing more expensive. If people borrow less, they will spend less. Cost-push inflation: This type of inflation is caused by persistent rises in costs of production (independently of demand). Inflation resulting form rising costs during periods of high unemployment and slack resource utilization is called cost-push inflation. There are three variants of cost-push inflation -The wage-price spiral -Profit-push inflation -Supply-side cost shocks/Import price-push inflation The wage-price spiral -Wages constitute nearly two-thirds of the cost of doing business -Whenever workers receive a significant wage increase, this increase is passed along to consumers in the form of higher prices -Higher prices raise everyone's cost of living, engendering further wage increases Profit Push -Because just a handful of firms dominate many industries, they have the power to administer prices rather than accept the dictates of the market forces of supply and demand -To the degree that they are able, these firms will respond to any rise in cost by passing them on to their customers Supply- Side Cost Shocks/ Import Price-Push Inflation -Finally, we have supply-side shocks, most prominently the oil price shocks of 1973-74 and 1979 *OPEC nations raised the price of oil *When the price of oil rises, the cost of making many other things rise as well -Cost increases are quickly translated into price increases Additional causes of cost-push inflation include: *Tax- push inflation - Increased taxation adds to the cost of living. *Exhaustion of natural resources - Depletion of major natural resources such as pollution of seas due to oil-spillage. The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production cost at each level of spending. Rising per-unit production cost squeeze profits and reduce the amount of output firms are willing to supply at the existing price level. This reduces the economy's supply of goods and services and the price level rises. In short, increasing costs are pushing price level upward. Policies to control Cost-Push inflation The aim here is to reduce the rate of increase in costs. This will help reduce leftward shifts in the aggregate supply curve. This can be done either by restraining monopoly influences on prices and incomes (e.g. policies to restrict the activities of trade unions), or by designing policies to increase productivity (e.g. giving various tax incentives). The govt. may also control cost-push inflation by encouraging an appreciation of currency or reducing indirect taxation. Deflation It can be termed as the opposite of inflation. Deflation indicates that the prices are going down. Disinflation It occurs when the RATE of inflation declines. Stagflation It exists in the economy when it is facing stagnation i.e. unemployment and rise in prices simultaneously. It occurs when the economy is in deep depression, in the Keynesian range of the aggregate supply curve. There'll be shortage of goods and unemployment will rise. Prices will also rise because factories are being closed and goods are insufficient. However, some kind of demand exists e.g. of consumer goods, and the lack of goods increase the prices. Four strains of inflation Inflation displays different levels of severity: *Low inflation/Mild inflation - In low inflation the prices rise very slowly. There is a single-digit annual inflation rate. When prices are relatively stable people trust money. They are willing to hold onto money because it will be almost as valuable in a month or a year as it is today. People are willing to write long-term contracts in money terms because they are confident that the relative prices of goods they buy and sell will not increase they will remain stable. *Zero inflation - It leads to the growth of the economy. However, some critics say that this sort of inflation will not adjust the nominal wages with real wages. *Galloping inflation - Inflation in the double or triple digit range is called galloping inflation. Once galloping inflation become entrenched, serious economic distortions occur. Money loses its vale very quickly so people hold only the minimum amount of money that is needed for daily transactions. People never lend money on low nominal interest rate and financial markets wither away. *Hyperinflation - It is an extremely rapid inflation whose impact on real output and employment usually is devastating. It usually arises when governments attempt to obtain extra revenue by printing money. When inflation begins to escalate, consumers, workers and businesses assume that it will rise even further. Eventually prices rise so rapidly that the monetary system breaks down, people would rather deal in barter terms, real GDP begins to fall, the economy loses the benefits of the division of saving and in the end the currency becomes worthless. Costs of Inflation *Debtors benefit from unanticipated inflation They get to repay their loan in dollars that are worth less than the dollars they borrowed. The biggest debtor and gainer from unanticipated inflation is always the government as it finds that people are paying more taxes. *Creditors, the people who lend out money, are hurt by unanticipated inflation The ultimate creditors, or lenders, are the people who put their money in banks, life insurance, or any other financial instrument paying a fixed rate of interest *People who live on fixed incomes, particular retired people who depend on pensions (except Social Security) and those who hold long-term bonds, are hurt by unanticipated inflation. However, when inflation is fully anticipated there are no winners and losers. Creditors have learned to charge enough interest to take into account, or anticipate, the rate of inflation over the course of the loan. This is tacked onto the regular interest rate that the lender would charge had no inflation been expected. *From the demand- pull side If there is a demand-pull inflation in the vertical or classical range of the AS curve, this would lead to serious consequences for the economy. Hyperinflation might take place because the demand is increasing and the economy has reached its full potential. *From the cost-push side If there's an increase in cost of production, there'll be increase in price level. This in turn will affect the aggregate demand. The fall in aggregate demand will lead to a fall in GDP and lower spending, accompanied by a rise in unemployment level. So far we have only discussed the demand-pull inflation and cost-push inflation in the short run. However, the real cost of inflation can only be determined if the effects of demand-pull and cost-push inflation are studied in the long run. References Acemoglu, Daron. 1996. "Good jobs versus bad jobs: Theory and some evidence." Cambridge, Mass.: Massachusetts Institute of Technology Bernstein, Jared and John Schmitt. 1997. The sky hasn't fallen: An evaluation of the minimum wage increase. Briefing paper. Washington, D.C.: Economic Policy Institute. Freeman, Richard. 1996. "The minimum wage as a redistributive tool." Economic Journal. Vol. 106, May, pp 639-49. Palley, Thomas I. 1996. "The positive employment, productivity and distributional effects of the minimum wage." Washington, D.C.: AFL-CIO. Wolfson, Paul. 1998. "A re-examination of time series evidence of the effect of the minimum wage on youth employment and unemployment." Carlson School of Management, Minneapolis, Minn.: University of Minnesota, unpublished paper. Bibliography Belman, Dale, and Paul Wolfson. 1997. "A time series analysis of employment, wages, and the minimum wage." University of Minnesota, unpublished paper. Belman, Dale, and Paul Wolfson. 1998. "The minimum wage: The bark is worse than the bite." University of Minnesota, unpublished paper. Bhaskar, V. and Theodore To. 1996. "Minimum wages for Ronald McDonald monopsonies: A theory of monopsonistic competition." University of St. Andrews, unpublished paper. Card, David and Alan Krueger. 1998. "A re-analysis of the effect of the New Jersey minimum wage increase on the fast-food Industry with representative payroll data." Cambridge, Mass.: NBER. Deere, Donald, Kevin Murphy, and Finis Welch. 1995. Employment and the 1990-1991 minimum wage hike. AEA Papers and Proceedings. Vol. 85, No. 2, pp. 232-37. Evans, William and Mark Turner. 1996. "Employment effects of minimum and subminimum wages: Comment on Neumark and Wascher." University of Maryland, unpublished paper. Palley, Thomas I. 1995. "Jobs versus hours: Explaining the employment effects of minimum wage regulations and other interesting things." New School for Social Research, unpublished paper. Wessels, Walter. 1997. "Restaurants as monopsonies: Minimum wages and tipped services." Economic Inquiry. Vol. 35, pp. 334-49. Williams, Nicolas and Jeffrey A. Mills. 1997. "The minimum wage and teenage employment: Evidence from time series." Cincinnati, Ohio: University of Cincinnati, unpublished paper. Williams, Nicolas and Jeffrey A. Mills. 1998. "Minimum wage effects by gender." Journal of Labour Research. Vol. XIX, No. 2, pp. 397-414. Read More