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QUANTITATIVE MACROECONOMICS

PROJECT
ANTI-UNEMPLOYMENT AND ANTI-INFLATION POLICES
IN ROMANIA
Abstract

Introduction

Chapter 1. Inflation

1.1. Definition of inflation

1.2. Causes of inflation

1.3. Types of inflation

1.4. Measuring inflation

1.5. Anti-inflation policies

Chapter 2. Inflation in Romania (2007-2014)

Chapter 3. Unemployment

3.1. Definition of unemployment

3.2. Types of unemployment

3.3. Causes of unemployment

3.4. Measuring unemployment

3.5. Anti-unemployment policies

Chapter 4. Unemployment in Romania (1996-2015)

Conclusion

Bibliography
Abstract

We’ve chosen this theme because we believe there is a strong relationship between inflation and
unemployment and we wanted to discover more information about the ways to diminish them
using policies of anti-inflation and anti-unemployment. Depending on the country, there are only
some policies that can be applied in order to have a positive impact on the economy of that
particular state.
Another important reason of choosing this topic is the use of inflation and unemployment rate in
governmental decision making for a stable economy. For example, the government has the
power to increase the number of jobs to reduce unemployment or decrease the price of imports
for reducing inflation.
In this project, there can be found significant information about the classification of inflation and
unemployment, how these indicators can be measured, what causes them to rise or fall and the
analysis of Romanian inflation and unemployment during some important periods of time.

Introduction
To attain sustainable economic growth coupled with price stability continues to be the central
objective of macroeconomic policies for most countries in the world today. Among others the
emphasis given to price stability in conduct of monetary policy is with a view to promoting
sustainable economic growth as well as strengthening the purchasing power of the domestic
currency. The question on whether or not inflation is harmful to economic growth has recently
been a subject of intense debate to policy makers and macro economists.
Anti-inflation policies refer to measures which can counteract inflation. The need for
counteracting inflation arises because its effects exercise great detrimental influences on the
economy of a country. It is for this reason that inflation has come to be considered an acutely
disagreeable phenomenon. It may be mentioned that inflation may not be necessarily injurious
under all circumstances but may be capable of mobilizing the industry of an economy especially
when inactivity has become its cardinal characteristic. This does not extenuate the evils of
inflation which, in view of their diverse character, have hardly retained any justification for its
existence. The disasters of inflation have been so great that economists in the present century
have made notable efforts in finding out measures for controlling it. The nature of anti-
inflationary policies cannot be readily appreciated unless the effect of inflation and the term is
precisely comprehended.
The national unemployment rate is defined as the percentage of unemployed workers in the total
labor force. It is widely recognized as a key indicator of labor market performance. A closely
watched economic indicator, the unemployment rate attracts a great deal of media attention,
especially during recessions and tough economic times.
As the U.S. Bureau of Labor Statistics (BLS) notes, when workers are unemployed, their
families lose wages, and the nation as a whole loses their contribution to the economy in terms of
the goods or services that could have been produced. Unemployed workers also lose
their purchasing power, which can lead to unemployment for other workers, creating a cascading
effect that ripples through the economy.

Unemployment even affects those who are still employed. When workers are let go, it increases
the amount of work those who are still employed have to cover. And because unemployment
usually increases when companies are trying to cut costs, those expected to pick up the slack are
not receiving any additional compensation for extra hours worked. Unemployment can also have
a negative mental effect on those who are still working. They may become more concerned about
losing their own jobs or be hesitant to look for something better because they "are lucky" to be
employed at all. They may even feel guilty about having a job when their co-workers are out of
work.

To better understand the nature of unemployment, policymakers need information on many


aspects of it, including the number of unemployed people, the period of time for which they have
been unemployed, their skill levels, the trend in unemployment, regional disparities in
unemployment and so on. Once these statistics have been obtained and interpreted, policymakers
can use them to make better-informed decisions about steering the economy and countering
unemployment.

Chapter 1. Inflation

1.1. Definition of inflation


Inflation is the process of making addition to currencies not based on a commensurate
increase in the production of goods. —Federal Reserve Bulletin (1919)

Most prominent among these inflationary forces were a drop in the exchange rate of the
dollar, a considerable increase in labor costs, and severe weather. —Federal Reserve
Bulletin (1978)

The term inflation was initially used to describe a change in the proportion of currency in
circulation relative to the amount of precious metal that constituted a nation’s money. By the late
nineteenth century, however, the distinction between “currency” and “money” was becoming
blurred. Today, inflation is synonymous with a rise in the general price level and therefore a fall
in the value of money. Inflation occurs when the amount of buying power is higher than the
output of goods and services. Inflation also occurs when the amount of money exceeds the
amount of goods and services available. As to whether the fall in the value of money will affect
the functions of money depends on the degree of the fall. Basically, refers to an increase in the
supply of currency or credit relative to the availability of goods and services, resulting in higher
prices. Therefore, inflation can be measured in terms of percentages. The percentage increase in
the price index, as a rate per cent per unit of time, which is usually in years. The two basic price
indexes are used when measuring inflation, the producer price index (PPI) and the consumer
price index (CPI) which is also known as the cost of living index number.

Inflation exists in a country whenever the supply of money and of [circulating] bank
deposits…increases, relatively to the demand for media of exchange, in such a way as to bring
about a rise in the general price level. (Emphasis added.) —Edwin Walter Kemmerer (1934)

1.2. Causes of inflation

Inflation comes in different forms and those at are familiar with the economic matters would
observe that there are trends in the way that prices are moving gradual and irregular in relation to
aggregate sections of the economy. This suggest that there is more than one factor that causes
inflation and as different
sections of the economy develop it gives rise to different types inflationary periods. The main
causes of inflation are:

a. Demand-pull inflation
b. Cost push inflation
c. Monetary inflation
d. Structural inflation
e. Imported inflation

a) Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces


aggregate supply. It involves inflation rising as real gross domestic product rises and
unemployment falls, as the economy moves along the Phillips curve. This is commonly described
as "too much money spent chasing too few goods”. More accurately, it should be described as
involving "too much money chasing too few goods," since only money that is spent on goods and
services can cause inflation. This would not be expected to happen, unless the economy is already
at a full employment level. It is the opposite of cost-push inflation.

b)Cost push inflation is a type of inflation caused by substantial increases in the cost of important
goods or services where no suitable alternative is available. It stands in contrast to demand-pull
inflation. Both accounts of inflation have at various times been put forward with oftentimes
inconclusive evidence as to which explanation is superior.
c)Monetary inflation occurs when there is an excessive supply of money. It is understood that the
government increases the money supply faster than the quantity of goods increases, which results
in inflation. Interestingly as the supply of goods increase the money supply has to increase or else
prices actually go down. When a dollar is worth less because the supply of dollars has increased,
all businesses are forced to raise prices just to get the same value for their products.

d)Structural inflation occurs because a government pursues an excessively loose monetary policy.
That is, if a central bank prints too much money or keeps interest rates too low for too long, the
value of each unit of currency drops more than it would simply from increased demand.

e) Imported inflation is caused by an increase in the price of imports. As the price of imports
increase, prices of domestic goods using imports as raw materials also increase, causing an
increase in the general prices of all goods and services. Imported inflation may be caused by
foreign price increases or depreciation of a country's exchange rate.

1.3. Types of inflation

Subsequently, when either the prices of goods or services or the supply of money rises; this is
considered as inflation. Depending on the characteristics and the intensity of inflation, there are
several types. The most important ones are:

− Creeping inflation: when there is a general rise in prices at very low rates, which is usually
between 2-4 percent annually.

− Trotting inflation: trotting inflation occurs when the percentage has risenfrom 5 to almost
percent. At this level it is a warning signal for most governments to take measures to avoid
exceeding double-digit figures.

− Galloping inflation: when inflation rises to 10 percent or more, it wreaks absolute havoc on
the economy. Money loses value so fast that business and employee income can't keep up with
costs and prices. Foreign investors avoid the country, depriving it of needed capital. The
economy becomes unstable, and government leaders lose credibility. Galloping inflation must be
prevented at all costs.

− Hyperinflation: when prices skyrocket more than 50 percent a month. It is very rare. In fact,
most examples of hyperinflation have occurred only when governments printed money to pay for
wars.

1.4. Measuring inflation


Consumer price index: The CPI is a measure of the price of a set group of goods and services.
The “bundle," as the group is known, contains items such as food, clothing, gasoline, and even
computers. The amount of inflation is measured by the change in the cost of the bundle: if it
costs 5%more to purchase the bundle than it did one year before, there has been a 5% annual rate
of inflation over that period based on the CPI. You will also often hear about the "Core Rate" or
the “Core CPI." There are certain items in the bundle used to measure the CPI that are extremely
volatile, such as gasoline prices. By eliminating the items that can significantly affect the cost of
the bundle (in either direction) on a month-to-month basis, the Core rate is thought to be a better
indicator of real inflation, the slow, but steady increase in the price of goods and services.

Formula:

The CPI in Romania:

Consumer Price Index CPI in Romania decreased to 100.49 Index Points in March from 100.79
Index Points in February of 2019. Consumer Price Index CPI in Romania averaged 102.58 Index
Points from 1990 until 2019, reaching an all-time high of 130.70 Index Points in March of 1997
and a record low of 97.05 Index Points in June of 2015.

The producer price index (PPI): measures the change in the purchasing power of the producers
of those goods. The PPI measures how much producers of products are getting on the wholesale
level, i.e. the price at which a good is sold to other businesses before the good is sold to a
consumer. The PPI actually combines a series of smaller indices that cross many industries and
measure the prices for three types of goods: crude, intermediate and finished. Generally, the
markets are most concerned with the finished goods because these are a strong indicator of what
will happen with future CPI reports. The CPI is a more popular measure of inflation than the PPI,
but investors watch both closely.

Formula:

The PPI in Romania:

Producer Prices in Romania increased to 110.50 Index Points in March from 109.90 Index Points
in February of 2019. Producer Prices in Romania averaged 84.51 Index Points from 2000 until
2019, reaching an all-time high of 110.50 Index Points in March of 2019 and a record low of
33.30 Index Points in January of 2000.

The evolution of the inflation rate in Romania in the past 4 years:

Implicit Price Deflator (IPD): The widest price index is the implicit price deflator or the GDP
deflator. This price index covers all output. Unlike the CPI and PPI, GDP deflator is not based on
a fixed basket of goods and services. GDP deflator enables a change of basket varied according
to the patterns of consumption and investment. GDP deflator is therefore not a pure measure of
price changes. Its value reflects both price changes and market response to these price changes,
reflected the new model costs. As a result, the GDP deflator will typically experience a lower
rate of inflation than the CPI index. GDP deflator is used to adjust the nominal value of output
(GDP) to change price levels. It is calculated as the ratio of nominal and real gross domestic
product of the economy.

Formula:

1.5. Anti-inflation policies

The purposes of the anti-inflation policies:


-Ensure economic growth that will enable monetary mass coverage
-the limitation of money in circulation
-Increase the purchasing power of money
-Determining the balance between money supply and GDP

In the case of cost inflation, one of the measures is controlling the prices. This measure can be
used only on the short run. On the long run it will lead to a lack of equilibrium between the
demand and the supply (the demand > the supply). There could also be other disadvantages of
using it, so this is a less recommended measure. On the short run, it can have its benefits, but on
the long run, it has more disadvantages than advantages.

In the case of wage induction, the recommended countermeasure is wage control. This can be
done through sacrificial curves or memorandums with trade unions, which accepts the reduction
of salaries by correspondingly reducing the salary. And this measure is only short-term because
both trade unions and employees cannot sustain long periods in which to reduce purchasing
power. Hence the possibility of social convulsions or loss of voters in favor of the party
promising to relax salary policy.

Reducing aggregate demand is another anti-inflationary measure that can be applied especially
in the case of demand-driven inflation. This reduction in aggregate demand can be determined
directly either by reducing public spending, either by raising tax and tax rates, or indirectly by
raising the interest rate, and hence reducing demand for investment and, implicitly, lowering
inflationary pressures. In this case, the main problem that arises is the drop-in income,
investment, hence the rise in unemployment and the negative influence of future economic
growth. Against this background, reducing aggregate demand is a recommended short-term
measure and accompanied by other measures to encourage economic growth.
Monetary policy can also influence the evolution of inflation. A restrictive monetary policy will
lead to higher interest rates and hence lower demand. Decrease in demand will result in lower
inflationary pressure and hence in falling prices.

A special issue in the inflation analysis is the wage indexation policy. In many countries, the
trade unions have been able to negotiate the possibility of including among the clauses of the
labor contracts one on the automation of wage indexation in relation to the cost of living.
Indexing all wages is a measure of reducing inflation, as wage growth is lower than the inflation
rate. In addition, unguaranteed earnings or losses resulting from errors in the inflation rate are
eliminated.

The most important issues are that a reduction in labor productivity should lead to a drop in real
wages, which the trade unions will not accept, so all losses will be borne by the employers,
which will lead to a drop-in supply, so a new inflationary pressure.

Chapter 2. Inflation in Romania (2007-2014)

In 2007, the inflation rate dropped by 1.72 percentage points, being fixed around 4.84%.
Tripping in the second semester in 2007 of action of two types of inflationary shocks caused an
increase of annual inflation rate in September at 6.03%, exceeded it by 2.23 percentage points
over that recorded in June placing it with 1.19 percentage points over the figure of annual
inflation. This year, the slight contraction which were recorded in the second quarter by annual
dynamics GDP (from 6% to 5.6%) was due mainly by amplification of the trade deficit, but also
cutdown own consumption against the backdrop of weak performance farm. In 2008, the annual
inflation rate has reached 7.90% rising by 3 percentage points compared to 2007.

The Quicker increases of wages and slower labor productivity in the period June-August 2008
compared with the dynamics of the first five months of the year, led to further growth of the
unitary labor cost. These developments generates inflationary effects both through wage
pressures on aggregate demand as a result of recording a physically surplus from earnings of
individuals which they will direct instinctively to consumers but without awareness at the
moment, the existence of factors of a counterbalance of "real value" of the income, reducing
purchasing power, which will induce subsequent a negative effect that will be felt more
pronounced and by the costs of labor on producer prices. In 2009, the annual inflation rate fell to
5.60%, with 2.30 percentage points below the level reached in the previous year (7.90%). The
dynamics of the inflation rate was favorably influenced by the significant deceleration of
increases in administered prices and food prices. In the latter case, the slowdown in growth was
significantly faster in the case of group volatile prices compared to the one recorded for food
prices. An opposite influence had an annual dynamic accelerated in fuel prices, due to a base
effect which dominated the impact of international oil price declining growth in the third quarter.
In 2010, the annual inflation rate rose to 6.10%, up 0.5 percentage points from the 5.60%
achieved in the previous year. Supply-adverse shocks, distinct from that of the VAT rate hike,
came from administered prices and food prices as a result of partial materialization of some risk
scenarios. In case of food goods, unfavorable developments were caused by substantial increases
of external prices in parallel with the contraction of domestic supply for some product categories,
after the floods in June-July, amid the significant base effects. In 2011, the annual inflation rate
fell l–5.80%, with only 0.3 percentage points below the 6.10% achieved in the previous year.

The main factor, anticipated by BNR has been the exhaustion, in large part, the first round effect
from 1 July 2010 of increase the VAT rate. The second factor, whose intensity and duration of
manifestation were more pronounced than anticipated, was the deflation registered in June to
September on the food segment with volatile prices (LFO). Abundant offer of unprocessed foods
due the rich agricultural production superimposed persistent supply demand created extremely
favorable circumstances of consumption prices disinflation. In 2012, the annual inflation rate fell
to 3.40%, with 2.4 percentage points above the 5.80% achieved in the previous year.
Determinants for reducing of annual inflation over the previous year were significant
decelerations of administered prices, from tobacco products and fuels. In case of the latter, the
favorable effect of significant decrease of international prices of crude oil surpassed opposite
influence of the depreciation of the national currency against the dollar (USD). The extent of the
disinflation process has been affected by volatile commodity price dynamics of the agri-food
goods as effect of the decrease of production domestically and internationally following the
adverse climatic conditions.

The annual growth rate continued to show negative values, but significantly lower in June
compared with the previous five months, signaling the transition of the statistical effect of the
basis from the favorable impact in the first half to the opposite influence already anticipated by
forecasts of BNR. The annual rate of growth of unit labor costs in industry has maintained
significantly in April-May 2012, which was mainly attributable to negative dynamics of labor
productivity. Recent downward trends in other sectors of the economy are likely in the second
quarter recording a rise in unit wage costs and along the entire economy. Avoid generation of
pressures from costs - in purpose of conservation the favorable inflation prospects, and also
maintaining macroeconomic balances - would require adequate correlation in future periods
between salaries and the growth of labor productivity. In 2013, the annual inflation rate is
slightly declining by 0.20 percentage points, reaching 3.2%. In the second half, the annual CPI
inflation rate was registered on a sharply downward trend, standing at end of the period at 1.88
percent in the lower half of the variation of ± 1 percentage point around the target of 2.5 percent.
Volatile prices recorded at the end of the review period a -4.5% annual growth rate, whose sharp
decrease compared to June 2013 (-12.1 percentage points) explained about half of CPI
disinflation in the second half. The slowdown was due to overwhelming manifestation of a
favorable base effect, especially in the segment of volatile food prices, affected the same period
of previous severe restriction of the production of vegetables and fruits. In addition, abundant
supply of vegetal production this year resulted in increased annual price deflation. July marked a
stage of liberalization of the energy market by introducing a competitive market component in
the final price of electricity supplied to households and increase natural gas tariff by 8%. At the
same time, the decrease of this component price and the diminish of the contribution for
sustaining renewable energy have reduced in July by 2.5% of final electricity tariff. The main
positive influences returned due to materialization of an exceptional agricultural year and the
reduction of VAT on some bakery products from 24% to 9% since September. Following this
change in the tax regime, the adjusted CORE2 inflation reached a record low of 0.49 percent.
Year 2014 brought an annual inflation to a historical unexpectedly low 1.40%, decreasing with
1.8 percentage points from the previous year.

Reducing the VAT rate since 1st September 2013 to some bakery products from 24% to 9%
contributed to comeback of inflation CORE 2 adjusted into positive territory in September at 1%.
Favorable evolution of adjusted CORE2 continued to be supported by fundamentals factors
represented by persistent negative output gap and inflation expectations significantly improving.
From other parts of the aggregate index of consumer prices, affected mainly by supply-side
factors, a relevant contribution in the sense of increasing inflation had have the significant
reduction of negative dynamics of prices volatile food to values close to zero, reflecting
succession of two years (2013 and 2014) with comparable agricultural productions. Favorable
effect on the annual rate of CPI inflation was generated by timing of price increases for groups of
fuels, tobacco products and alcoholic beverages and administered prices. Determinants of these
developments were, in the first case, the reorientation of the Romanian market of exports for
fruit and vegetables from some European countries affected by restrictions recently imposed by
Russia, and in the second case, the reduction in September of international quotations oil to a
minimum of recent years. The downward trend in unit labor costs in industry, manifested the
whole second quarter of 2014 was interrupted in July and August due to the lower labor
productivity growth. Across to economy, the gross nominal earnings growth has accelerated
slightly as a result of new increases in July of the gross minimum wage economy. In the short
term, the negative persistence of output gap reduces the risk of significant inflationary pressures
from wage costs. In the medium term, but in the same time with the approaching of GBP to the
normal level, and especially in the event of materialization of further increases in the minimum
wage, maintaining an adequate correlation between wage growth and labor productivity is
essential for strengthening price stability.

Chapter 3. Unemployment

Literature Review
According to Vogel (2003), labor market is the main arena where the individual living conditions
are determined. The labor market is such an important market for the good operations of
economy that it could be considered the barometer for reaching competition economy.

Broadly speaking, the labor market includes matters that refer to employment, unemployment,
work quality, productivity, incomes and labor costs. This makes the labor market to be among
the key topics in the EU social and political debates. It is no accident that the 2020 Europe
Strategy has as first indicator precisely the population employment rate. In this respect, the
European Employment Strategy (ESS), having as objective the creation of more and better
workplaces in the EU, requires for the purpose of following the results an analytical and
statistical support that can help with the assessment of development in the field of the labor
market.

The 2020 Europe Strategy was launched in 2010. According to it, the fundamental goal
constitutes the creation of more work places and the provision of better living conditions. This
strategy aims at ensuring an intelligent, lasting growth that is beneficial to inclusion.
Specifically, there are five strategic priorities among which the first one is the increase of the
employment rate of the 20 to 64-year-olds from 69% to at least 75%.

In Romania, unlike in other EU member countries, there is another major consequence of the
labor market dysfunctions namely, the existence in agriculture of a large number of people who
have the status of independent workers and, respectively, unpaid family workers. In fact, these,
being only partially or even informally employed (the proof lies in the very low income with
which they are officially registered, near or under the poverty threshold) and not being adapted
or mobile in respect to the current conditions on the Romanian labor market, should practically
be excluded from the work force and possibly placed in a special category of ‘unemployment’.
However, because of the professional status given to them and taking into account they are not
legally entitled to unemployment benefits they are still formally registered within the employed
person category of the statistical system (Albu, Caraiani, Iordan, 2011). In times of crisis, a
discrepancy emerges between the wish for (potential for) seeking new employment opportunities
and incomes and the possibilities (capability) of absorbing this rising demand. In such periods
major tensions occur on the labor market, the mobility of the workforce being sometimes limited.
The tensions may occur on multiple levels: between the unemployed and the employed, between
the young workforce seeking employment and those nearing retirement, between the immigrants
and the native workforce, between the well qualified and well-paid and the poorly-qualified who
are poorly-paid. In these conditions, competition becomes fierce on the labor market, and
employers can take advantage of the occasionally exaggerated decrease of labor cost, including
the diminishing of funds assigned to professional requalification (i.e., re-training).

In Europe, over the last years, debates about the simultaneous concentration on both labor market
flexibility and labor security perceived from all viewpoints (the so-called flexicurity) are
permanently on the agenda of employees and unions, which is expected to have a major impact
on social policies (Albu, Caraiani, Iordan, 2011). The mobility of the workforce is influenced,
apart from the differences among economic sectors in respect to salaries, productivity, work
conditions, etc., by differences existing at territorial, regional, county and place levels. One of
the factors is the distribution across regions of the gross income and the net income. Eichhorst,
Escudero, Marx and Tobin (2010) claim that the countries which were able to rely on a strong
internal flexibility managed to control better the loss of jobs and the increase of unemployment.
Moreover, they claim that this was possible due to the protection of the labor market core
through strict rules regarding employment and the adjustments of the work hours and salaries
and not through massive dismissals. In respect to employment, a set of measures in keeping with
the 2020 Europe Strategy for Romania meant to increase the people’s employment rate can be
mentioned:

• the reform of the legal frame regarding the stimulation of the employment rate and continuous
professional formation;

• investments in continuous professional formation with emphasis on people from vulnerable


groups (rural areas and inactive);

• case studies about the correlation between demand and offer on the labor market and the
estimation of the required qualifications;

• measures to sustain transition from unemployment or inactivity to employment;

• improvement of the legal frame and the stimulation of extending an active life;

• consolidation of social dialogue;

• increased efficiency to better correlate the social assistance system with the employment sector;

• modernization of the agricultural sector and the extension of economic activities in the rural
area (services and small industries).

3.1. Definition
Unemployment is defined by the Bureau of Labor Statistics as people who do not have a job,
have actively looked for work in the past four weeks, and are currently available for work.
Also, people who were temporarily laid off and were waiting to be called back to that job are
included in the unemployment statistics. The BLS reports this in the U-3 report, a part of the
monthly jobs report.
Unemployment is a key economic indicator because it signals the (in)ability of workers to readily
obtain gainful work to contribute to the productive output of the economy.
More unemployed workers mean less total economic production will take place than might have
otherwise. And unlike idle capital, unemployed workers will still need to maintain at least
subsistence consumption during their period of unemployment. This means the economy with
high unemployment has lower output without a proportional decline in the need for basic
consumption. High, persistent unemployment can signal serious distress in an economy and even
lead to social and political upheaval.
On the other hand, a low unemployment rate means that the economy is more likely to be
producing near its full capacity, maximizing output, and driving wage growth and rising living
standards over time. However, extremely low unemployment can also be a cautionary sign of an
overheating economy, inflationary pressures, and tight conditions for businesses in need of
additional workers.

3.2. Types of Unemployment


Economists divide unemployment into many different categories. The two broadest categories of
unemployment are voluntary and involuntary unemployment.
When unemployment is voluntary, it means that a person has left his job willingly in search of
other employment. This occurs when workers choose not to take a job at the going wage rate.
For example, if benefits offer a similar take-home pay to (wage – tax), the unemployed may feel
there is no incentive to take a job. Reasons for voluntary unemployment may include:
· Generous unemployment benefits, which make accepting a job less attractive.
· High marginal tax rates, which reduce effective take-home pay.
· Unemployed hoping to find a job more suited to skills/qualifications.
· Some jobs are seen as ‘demeaning’ or too tedious. For example, fruit picking/security
guard.
When it is involuntary, it means that a person has been fired or laid off and must now look for
another job.

Demand Deficient Unemployment


Demand deficient unemployment occurs in a recession or period of very low growth. If there is
insufficient aggregate demand, firms will cut back on output. If they cut back on output, then
they will employ fewer workers. Firms will either cut back on recruitment or lay off workers.
The deeper the recession, the more demand deficient unemployment there will be. This is often
the biggest cause of unemployment, especially in a downturn. This is also known as cyclical
unemployment – referring to how unemployment increases during an economic downturn.

Diagram showing fall in AD and


lower output (Y1 to Y2)- which leads to higher unemployment

Frictional Unemployment
Frictional unemployment arises when a person is in between jobs. After a person leaves a
company, it naturally takes time to find another job, making this type of unemployment short-
lived. It is also the least problematic from an economic standpoint. Frictional unemployment is a
natural result of the fact that market processes take time and information can be costly. Searching
for a new job, recruiting new workers, and matching the right workers to the right jobs all take
time and effort to do, resulting in frictional unemployment.

Cyclical Unemployment
Cyclical unemployment is the variation in the number of unemployed workers over the course of
economic upturns and downturns. Unemployment rises during recessionary periods and declines
during periods of economic growth. Preventing and alleviating cyclical unemployment during
recessions is a major concern behind the study of economics and the purpose of the various
policy tools that governments employ on the downside of business cycles to stimulate the
economy.

Structural Unemployment
This is unemployment due to inefficiencies in the labor market. It may occur due to a mismatch
of skills or geographical location.
Causes of structural unemployment:
 Occupational immobility. There may be skilled jobs available, but many workers may
not have the relevant skills. Sometimes firms can struggle to recruit during periods of
high unemployment. This is due to occupational immobility.
 Geographical immobility. For example: jobs may be available in London, but
unemployed workers may not be able to move there due to difficulties in getting
housing.
 Technological change. If an economy goes through technological change, some
industries will decline. This is likely to lead to structural unemployment. For example,
new technology -nuclear power could make coal mines close down, leaving many coal
miners unemployed. Or the replacement of horse-drawn transport by automobiles leads
to unemployment among workers displaced from jobs that are no longer needed.
Retraining these workers can be difficult, costly, and time consuming, and displaced
workers often end up either unemployed for extended periods or leaving the labor
force entirely.

Institutional Unemployment
Institutional unemployment is unemployment that results from long term or permanent
institutional factors and incentives in the economy. Government polices such as high minimum
wage floors, generous social benefits programs, and restrictive occupational licensing laws; labor
market phenomena such as efficiency wages and discriminatory hiring; and labor market
institutions such as high rates of unionization can all contribute to institutional unemployment.

Real Wage Unemployment / Classical Unemployment

This occurs when wages are artificially kept above the equilibrium. For example, powerful trades
unions or minimum wages could lead to wages above the equilibrium leading to an excess
supply of labor (this assumes labor markets are competitive) In the above example an artificial
wage of W2 keeps wages above the equilibrium level of W1. This leads to a fall in demand for
labor (Q2). Supply also rises to Q3.

(Keynesian analysis suggests a fall in


AD can lead to real wage unemployment because wages are sticky downwards. After a fall in
demand equilibrium wages should fall – but they don’t so unemployment rises.)

Seasonal Unemployment

In certain regions, unemployment may be seasonal e.g. unemployment rises in winter when there
are no tourists.
Disguised / Hidden unemployment

Often unemployment statistics don’t include certain types of workers. For example, those put-on
incapacity benefit may not be counted as unemployed, but, it may really be a type of structural
unemployment.

3.3. Causes of Unemployment

There are seven causes of unemployment. Four causes create frictional unemployment. This type
of unemployment is when employees leave their job to find a better one. Two causes create
structural unemployment. That is when workers' skills or income requirements no longer match
the jobs available. The seventh cause leads to cyclical unemployment.

Causes of Frictional Unemployment


1) Voluntarily leaving the workforce. Some of the unemployed have saved enough money so
they can quit unfulfilling jobs. They have the luxury to search until they find just the right
opportunity.
2) Relocation. Some are unemployed until they find a position in the new town.
3) New workers entering the workforce. This includes students who graduate from high
school, college or any higher degree program. They look for a job that fits their new skills and
qualifications. That is a primary cause of youth unemployment.
4) Job seekers re-entering the workforce. These are people who went through a period in
their lives when they stopped looking for work. They could have stopped working to raise
children, get married or care for elderly relatives. These four causes are an unavoidable part of
the job search process. The good news is that frictional unemployment is usually voluntary and
short-term.

Causes of Structural Unemployment


Structural unemployment is neither voluntary nor short-term. These next two causes usually lead
to long-term unemployment.
1) Advances in technology. This is when computers or robots replace workers. Most of these
workers need more training before they can find a new job in their field.
2) Outsourcing. That is when a company moves its manufacturing or call centers to another
country. Labor costs are cheaper in countries with a lower cost of living.

What Causes Cyclical Unemployment?


Unemployment occurs when there are fewer jobs than applicants (demand-deficient
unemployment). Low consumer demand creates cyclical unemployment. Companies lose too
much profit when demand falls. If they don't expect sales to pick up anytime soon, they must lay
off workers. The higher unemployment causes consumer demand to drop even more, which is
why it’s cyclical. It results in large-scale unemployment. Examples include the financial crisis of
2008 and the Great Depression of 1929.

3.4. Measuring the Unemployment

The BLS measures unemployment through monthly household surveys called the Current
Population Survey. It has been conducted every month since 1940, as part of the government's
response to the Great Depression.
The BLS does not count everyone who is jobless as unemployed. It excludes those who have not
looked for work within the past four weeks. The Bureau also removes them from the labor force.
Most people leave the labor force when they retire, go to school, have a disability that keeps
them from working, or have family responsibilities. The BLS doesn't count people who would
like to work but they aren't actively looking for work.
The BLS does keep track of those people, though. They are reported in the U-6 unemployment
rate. Some people call this the real unemployment rate. It includes those who have looked for
work within the past 12 months, but not within the past four weeks. The Bureau calls them
"marginally attached to the labor force." A subset of the marginally attached is called
discouraged workers. They have given up looking because they don't think there are jobs out
there for them.

Latest Romanian Unemployment Rates:

3.5. Anti-unemployment policies


There are two main strategies for reducing unemployment:

1) Demand side policies to reduce demand-deficient unemployment


2) Supply side policies to reduce structural unemployment / (the natural rate of
unemployment)
A quick list of policies to reduce unemployment:

 Monetary policy – cutting interest rates to boost Aggregate Demand (AD)


 Fiscal policy – cutting taxes to boost AD.
 Education and training to help reduce structural unemployment.
 Geographical subsidies to encourage firms to invest in depressed areas.
 Lower minimum wage to reduce real wage unemployment.
 More flexible labor markets, to make it easier to hire and fire workers.

Policies to reduce supply side unemployment


Supply side policies deal with more micro-economic issues. They don’t aim to boost overall
aggregate demand but seek to overcome imperfections in the labor market and reduce
unemployment caused by supply side factors. Supply side unemployment includes: frictional,
structural, classical (real wage).

a) Education and training. The aim is to give the long-term unemployed new skills
which enable them to find jobs in developing industries, e.g. retrain unemployed steel
workers to have basic I.T. skills which help them find work in the service sector.
However, despite providing education and training schemes, the unemployed may be
unable or unwilling to learn new skills. At best it will take several years to reduce
unemployment.

b) Reduce the power of trades unions. If unions can bargain for wages above the
market clearing level, they will cause real wage unemployment. In this case reducing the
influence of trades unions (or reducing minimum wages) will help solve this real wage
unemployment.

c) Employment subsidies. Firms could be given tax breaks or subsidies for taking
on long-term unemployed. This helps give them new confidence and on the job training.
However, it will be quite expensive, and it may encourage firms to just replace current
workers with the long-term unemployment to benefit from the tax breaks.

d) Improve labor market flexibility. It is argued that higher structural rates of


unemployment in Europe is due to restrictive labor markets which discourage firms from
employing workers in the first place. For example, abolishing maximum working weeks
and making it easier to hire and fire workers may encourage more job creation.
However, increased labor market flexibility could cause a rise in temporary employment
and greater job insecurity.

e) Stricter benefit requirements. Governments could take a more pro-active role in


making the unemployed accept a job or risk losing benefits. After a certain period, the
government could guarantee a public sector job (e.g. cleaning streets). This could
significantly reduce unemployment. However, it may mean the government end up
employing thousands of people in unproductive tasks which is very expensive. Also, if
you make it difficult to claim benefits, you may reduce the claimant count, but not the
International Labor force survey.

f) Improved geographical mobility. Often unemployed is more concentrated in


certain regions. To overcome this geographical unemployment, the government could
give tax breaks to firms who set up in depressed areas. Alternatively, they can provide
financial assistance to unemployed workers who move to areas with high employment.
(e.g. help with renting in London).

Demand side policies

Demand side policies are critical when there is a recession and rise in cyclical unemployment.
(e.g. after 1991 recession and after 2008 recession).

1) Fiscal Policy

Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate
of economic growth. The government will need to pursue expansionary fiscal policy; this
involves cutting taxes and increasing government spending. Lower taxes increase disposable
income.

With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity
in the economy.) If firms produce more, there will be an increase in demand for workers and
therefore lower demand-deficient unemployment. Also, with higher aggregate demand and
strong economic growth, fewer firms will go bankrupt meaning fewer job losses.

Keynes was an active advocate of expansionary fiscal policy during a prolonged recession. He
argues that in a recession, resources (both capital and labor) are idle. Therefore, the government
should intervene and create additional demand to reduce unemployment.
2) Monetary policy

Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing
and encourage people to spend and invest. This increases AD and should also help to increase
GDP and reduce demand deficient unemployment.

Also, lower interest rates will reduce exchange rate and make exports more competitive.

In some cases, lower interest rates may be ineffective in boosting demand. In this case, Central
Banks may resort to Quantitative easing. This is an attempt to increase the money supply and
boost aggregate demand.

Chapter 4. Unemployment in Romania

Unemployment analysis
In order to explain the variation of the unemployment rate across Romania’s developing regions
we have used the series of data offered by the National Institute of Statistics from the Tempo-
online databases out of which we extracted the series corresponding to the 1990-2015 period for
the following variables:
• total number of graduates
• balance of residence change
• natural population growth
• monthly net nominal income
• annual spending with the social protection of the unemployed
• GDP

The individual effect specific to each region (αi) may be a fix parameter that can be estimated if
the model is with fixed effects or may be a random perturbation that affects a specific region if
the model is with random effects. In the case of the model with fixed effects, the variable
expression may differ from region to region but is unchanging over time; the slope of regression
is instead the same for all the regions. The models with random effects, on the other hand, allow
the estimation of variables that remain unchanged over time. In order to make a solid decision
three models have been estimated, namely: the model obtained through regression, the panel-
type model with fixed effects, the panel-type model with random effects.
To decide which model is more suitable to characterize the manner of influence for the factorial
variables on the resulting variable (the unemployment rate) we have used the Hausman test.

The Hausman test puts to test the following hypothesis:

H0 – the model with random effects is recommended

H1 – the model with fixed effects is recommended

The results are presented below:

chisq = 93.6, df = 6, p-value < 2.2e-16


As the p-value is less than 5% the null hypothesis is rejected and the alternative hypothesis is
accepted and in this way the model with fixed effects is recommended.

The next decision is to choose the appropriate model between the one with fixed effects and the
one obtained by means of multiple regression. In this case we have used the F test for individual
effects. The F test for individual effects puts to test the following hypothesis:

H0 – the Pooled model is recommended

H1 – the model with fixed effects is recommended.

The results of this test are presented below: F = 10.284, df1 = 7, df2 = 146, p-value = 1.912e-10

As the p-value is less than 5% the null hypothesis is rejected and the alternative one is accepted
and in this way the model with fixed effects is the recommended one and is actually reconfirmed
by means of this test, too.

Out of the analysis of the values yielded following the panel-type testing with the help of the
model with fixed effects the following conclusions can be drawn:
 The link between the total number of graduates and the unemployment rate is a reverse
type so that we may say that one per cent increase of the total number of graduates leads
to a diminishing of the unemployment rate by 1.37%. This thing can be explained
through the fact that Romanian youths in general do not seek a job immediately after
graduation and prefer to remain for a while under the family’s ‘protection’. Also, a
worrying trend over the last years has been the migration of young people especially from
the rural areas to the EU developed countries.
 Also, there is a reversed link between the balance of residence change across Romania’s
developing regions and unemployment rate. This thing indicates that one unit increase in
the balance of residence change results in 0.0002 unit decrease in the unemployment rate.
This aspect confirms the fact that the regions that succeed in having a dynamic growth of
economy manage to draw labor force from other regions and to have a falling
unemployment rate.
 It seems that the natural population growth variable does not offer a significant value
from a statistical viewpoint in order to explain the evolution of the unemployment rate.
 The increase of the monthly net nominal income by one per cent has led to a decrease of
unemployment by 3.6%. The salary policy constitutes a motivating factor in maintaining
and attracting new employees.
 On the other hand, increases by one per cent in the annual spending with the unemployed
people’s social protection lead to a 0.58% increase in the unemployment rate. Ensuring a
raising income during the period of unemployment seems to discourage the unemployed
people from constantly seeking a job.
 Similarly, from the analyzed data results that one percentage increase in the GDP at the
level of developing region leads to a 3.28% increase in the unemployment rate. This
aspect confirms the conclusions of Hall (1972) according to which the population that
lives in a community benefiting from a better life quality is more tolerant towards an
increased unemployment rate.

As the panel-type model with fixed effects allows the identification of the individual effects of
the regions included in the analysis, the values corresponding to this effect were also calculated.
Their interpretation is done having as basis of comparison the Bucharest-Ilfov region.

In contrast to the Bucharest-Ilfov region, the regions of Center, South-East, South Muntenia,
SouthWest Oltenia, and West show higher BIM unemployment rates with values ranging
between 0.13% and 1.26%. These differences are recorded and explained by the model as having
other causes apart from those included in the current analysis. A case may be made about
differences starting from mentality, culture, to differences at the level of public investments in
road infrastructure.

The only two regions which, in comparison to the Bucharest-Ilfov region have, on average,
lower unemployment rates are the North-East and the North-West, with the latter region having a
significant rate from a statistical point of view. Again, possible explanations for these differences
can be the items previously presented, but it is most likely that this can be accounted for through
the consistent migration of population from that area to the EU member states.

Conclusion
All the anti-inflation and anti-unemployment measures, applied individually, somehow limit
economic growth, so the most beneficial would be the use of a "mix" of these policies, thus
disrupting economic development. This combination should include exchange, public budget,
money supply and, in some cases, direct measures on prices and wages. Each country faces in
certain situations with different economic problems that drive inflation, but by combining these
measures, the negative effects will be reduced or even stopped in a much shorter time, and the
damages recovered. Even the world's big economic powers cannot avoid the emergence of
imbalances in the economy, but through adopted policies they can recover shortly and help other
transition or even underdeveloped countries to overcome these moments of crisis.
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