7/31/2019 Chapter 5 BED 2-2 2011

1/27

Chapter 5 Employment and Unemployment

Keeping of unemployment level as low as possible is

one of the main objectives of macroeconomic. Thechanges in population have an impact on the creationof employment in a country.

Population census are under taken every 5 years bystats South Africa ( 1980,1985,1991, 2001,2006)There are also mid-estimates using the previous termcensus. Census are usually no accurate some peopledo not be counted.

Economically active population/ labour force; totalnumber of people who are willing and able to work oreconomically active population. Unemployment rate is

number of people who are willing and able to work butdo not work / total number of people who are willingand able to work * 100

7/31/2019 Chapter 5 BED 2-2 2011

2/27

Click to edit Master subtitle style

FORMAL AND INFORMAL EMPLOYMENT

Informal sector is unrecorded economy activities.Three reasons for people to encage in the informal

sector activities.1. They do not want to pay tax2. They cannot find employment in the formal sector3. They are engaged in the illegal activities

Some of the activities in the informal sectorLegal or socially acceptable one

7/31/2019 Chapter 5 BED 2-2 2011

3/27

Legal or socially acceptable

1. production e.g. self-employed: dressmaker

2. Distribution e.g. unregistered furnisher removal

3. Services e.g. Taxi operators/ healers

Illegal/socially unacceptable

1. Production e.g. dagga producers 2. Distributors e.g. drug traffickers

3. Services e.g. credit sharks (mashomisas)

Estimated value of the informal sector activities were included in theofficial national account for the first time in 1994.

7/31/2019 Chapter 5 BED 2-2 2011

4/27

Employment Coefficient

Employment coefficient or production elasticity ofemployment is used to measure the degree ofresponsiveness of employment to economic growth.

Calculation = % change in formal employment / the real

GDP growth rate for successive period of five years.

7/31/2019 Chapter 5 BED 2-2 2011

5/27

Labour absorption Capacity

Is an indicator of employment performance of theeconomy. It is the ratio or percentage of new entrantsto the labour force that are able to find employment inthe formal sector of the economy.

Unemployment

An unemployed person is someone who seeks butcannot fond employment.

Unemployment Rateis the total number ofunemployed person as a % of the total number ofavailable workers

7/31/2019 Chapter 5 BED 2-2 2011

6/27

Two Definition of unemployment

Strict definition is used in international comparison ofunemployment in the developing countries.

Expanded definition is more suitable for developingcountries.

Strict definition: unemployed person are those peoplewithin the economically active population who: 1. did not work during the seven days prior to the interview 2. want to work and are available to start within two weeks

of the interview. 3. have taken active steeps to look for work or to start

some form of self-employed in the four week before to theinterview.

7/31/2019 Chapter 5 BED 2-2 2011

7/27

Differences between the strict and expandeddefinition

Is that in the expanded people should only show a desire to findemployment even if they did not take steps to do so.

Information used to estimate unemployment

1. Census data

2. register unemployment with the department of labour(voluntarily in SA)

3. Sample survey data , generated by surveying a number ofhousehold

4.Data on the economically active population 5. Data on total employment

7/31/2019 Chapter 5 BED 2-2 2011

8/27

Residual

Is the differences between the labour force (EAP) andformal employment.

Job scarcity is the number or percentage of workerswithout formal employment as a residual..

Underemployment is when the workers are not fullyemployed.

Two types of under employment: Visible and Invisible

7/31/2019 Chapter 5 BED 2-2 2011

9/27

Visible and Invisible underemployed

Visible:a person is involuntarily work less than full time,fewer than normal; hours, days, weeks or months, e.g.part-time workers, casual workers and seasonal workers.Unemployment is also linked to efforts by employer toavoid trade unions influence by employing large numbersof part-time or casual workers instead of smaller number offull-time workers (casualisation)

7/31/2019 Chapter 5 BED 2-2 2011

10/27

Clandestine Employment

Clandestine employment refers to the undeclaredemployment of workers e.g. illegal immigrants to avoidsocial security contribution and other aspects of labourlegislation.

Invisible underemployment is misallocation of labouras a results of an underutilisation of skill or lowproductivity, e.g. qualified engineer working as a shopassistance.

International Comparison: International LabourOrganisation register worldwide labour Statistics.

END

7/31/2019 Chapter 5 BED 2-2 2011

11/27

Chapter 6 Inflation

Inflation is sustained, frequently rapid price increases.Many other economic variables such as wages,salaries, interest rate and rent are directly or indirectlylinked to price increases. Inflation is defined as a

sustainable increase in the general price level. IndexNumber is defined as the ratio between the value of avariable or group of variables at a given time or duringa specific period and its value at a base time or during

a base period X 100.

7/31/2019 Chapter 5 BED 2-2 2011

12/27

Index Number

Price Index Number= cost of basket in current year/ cost ofbasket in base year x100. An index is a series of indexumber with a fixed frequency ( monthly, quarterly yearly).ASpecific Index e.g. index of maize production. A general or

composite index is obtained by combining variable orspecific indices in core index e.g. Industrial production orconsumer price Index.

7/31/2019 Chapter 5 BED 2-2 2011

13/27

Five basic steps of constructing ageneral or composite index. 1. the choice of items or component the (basket) 2. the choice of the base period 3. the assignment of weights/ to the different items 4. the collection of data 5. the calculation of the index number

Choice of items to be included in the basket

The list of items to be included in a general or composite index isreferred to as the basket or regimen. The choice items dependson the relative significance of each potential item and itsmeasurability.

7/31/2019 Chapter 5 BED 2-2 2011

14/27

Choice of base period

The main criteria used in selecting a base period1. Base period should be relatively recent the more

recent the base period the more comparable thecurrent figures are.

2. The base period should preferably fall in aneconomically stable or normal period, becausedistorted picture could be obtained.

3. Common base period for all indices4. Censes, survey or sample year are often used as a

base period, because comprehensive data areavailable for the relevant variables

7/31/2019 Chapter 5 BED 2-2 2011

15/27

The assignment of weights to the different items

1. The weight has to be assigned to each itemaccording to its relative importance

2. The importance of each price is determined by theproportion of income spent on the production

concerned.3. The weights usually add up to 1 or 100 or full.4. Choice also has to be made between current

period weight (paasche method) or fixed base period

weigh (laspeyres) or a mixture of the two (fishermethod)

7/31/2019 Chapter 5 BED 2-2 2011

16/27

Price Indices

Composite price Index number is calculated by comparingthe weighted average price of a selected basket of goodsand services to the weighted average cost of the samebasket in the base year. Explicit price Indices e.g.( CPI andPPI) and implicit price deflators can also be derived fromthe ratio between nominal (current ) price and real(constant price) magnitudes.

7/31/2019 Chapter 5 BED 2-2 2011

17/27

Steps to be taken when constructing a composite priceIndex

1. Basic selection: A representation sample of goods and servicesof items to be included has to be determined.

2. base year selection: International Prescriptions orrecommendations by (e.g. International Monetary Funds and

united Nations are frequently the decisive factors.

To facilitate international comparisons common round base year(e.g. 1990,1995 and 2000) are usually chosen and samplesurveys to determine the appropriate weighting of the different

items tend to be conducted in these years

7/31/2019 Chapter 5 BED 2-2 2011

18/27

7/31/2019 Chapter 5 BED 2-2 2011

19/27

Shifting of the base period an index

Year CPI Calculation CPI 2000=100

1997 166,6 (166,6/138.1) x 100 84,4

1998 124,6 (124,6/138.1) x 100 90.2

Until you reach 100.0 at the end of CPI column

Fundamental shift of the base period is when the CPI has beenreconstructed on the basis of the new weights.

The adapted formula used for constructing price indices as page11 for formula

7/31/2019 Chapter 5 BED 2-2 2011

20/27

Problems associated with price Indices

1. Laspeyres index number tend to be biased upwards

2. there is a problem when the quality of the productchanges.

3. New product

4. Advertised price and actual transaction pricesdiffer.

Certain goods are custom- made

Price Index is an average.

7/31/2019 Chapter 5 BED 2-2 2011

21/27

The Consumer Price Index

CPI is an index of the prices of a representativebasket of consumer good and services. It iscalculated and publish by Stats SA

CPI is to calculate inflation rates. Approximately 110

000 price quotation of 1500 goods are surveyed.Deflating a time series or index means converting anominal time series or index to a real time series orindex.

Inflation is opposite of deflating.

Current price/ CPI X 100 = constant price

7/31/2019 Chapter 5 BED 2-2 2011

22/27

Inflating

Inflating working backward from deflacting

Real price x CPI/ 100 = nominal.

Cumulative increase: (the last number divided by the firstnumber)-1) x 100.

Advantages of using CPI

1. CPI is explicit price index

2. it is directly calculated and becomes available rapidlyand accurate and reliable

7/31/2019 Chapter 5 BED 2-2 2011

23/27

Disadvantages of using CPI

1. It is subject to all explicit price index because it isbased on a fixed base-year weights.

2. it is upwardly biased because changes in consumerexpenditure are ignored.

3.Not all consumer goods and services are included

4. the shift from direct tax to indirect tax is reflected inthe increase in CPI as tax is included in CPI.

7/31/2019 Chapter 5 BED 2-2 2011

24/27

Calculating an inflation rate

The inflation rate preferably should always be annualised iebe expressed as an annual rate. Month on same month ofthe previous year.The most common practice in South

Africa is to compare the index number for a particular

month with the index number of the previous year. Theresult is expressed as a percentage change .

7/31/2019 Chapter 5 BED 2-2 2011

25/27

Calculation of Inflation

Eg December 2004 index of 125,0 compare toDecember 2004 index of 120,9

= current index previous/ previous x 100

(125,0 -120.9/120,9 -1 ) x100= 3,4%. If there is certain rise in the fall or increase in the rate

of increase in the CPI cause by factors such as petrol

price economics call it techical reasons or statisticalnoise.

7/31/2019 Chapter 5 BED 2-2 2011

26/27

Annual Average on annual average (12-months moving average Is when inflation rate for a calendar year is calculated, the

average of all the monthly indices in a particular year withthe corresponding average for the previous year. Add allthe month for 2003 divide by 12 and all month for 2004divide by 12.

=(current previous/previous)x100 Eg 123.8 -122.1/122,1 x100 = 1.4% or 123.8/122.1-1 x100

= 1,4%

7/31/2019 Chapter 5 BED 2-2 2011

27/27

Annual Average on annual average

Annual Average on annual average eliminate thefluctuations in index.

Month on the previous month at annual rate. Comparisonof particular months figure with that of the immediately

preceding months. The ratio of the consecutive monthlyfigure is obtained