Chapter 5 Employment and Unemployment

Keeping of unemployment level as low as possible is

one of the main objectives of macroeconomic. The changes in population have an impact on the creation of employment in a country. Population census are under taken every 5 years by stats South Africa ( 1980,1985,1991, 2001,2006) There are also mid-estimates using the previous term census. Census are usually no accurate some people do not be counted. Economically active population/ labour force; total number of people who are willing and able to work or economically active population. Unemployment rate is number of people who are willing and able to work but do not work / total number of people who are willing and able to work * 100

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 tax 2. They cannot find employment in the formal sector 3. They are engaged in the illegal activities Some of the activities in the informal sector Legal or socially acceptable one

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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)
official national account for the first time in 1994.

Estimated value of the informal sector activities were included in the

Employment Coefficient
Employment coefficient or production elasticity of

employment is used to measure the degree of responsiveness of employment to economic growth. Calculation = % change in formal employment / the real GDP growth rate for successive period of five years.

Labour absorption Capacity

Is an indicator of employment performance of the

economy. It is the ratio or percentage of new entrants to the labour force that are able to find employment in the formal sector of the economy. Unemployment An unemployed person is someone who seeks but cannot fond employment. Unemployment Rate is the total number of unemployed person as a % of the total number of available workers

Two Definition of unemployment

Strict definition is used in international comparison of

unemployment in the developing countries. Expanded definition is more suitable for developing countries. Strict definition: unemployed person are those people within 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 the interview.

Differences between the strict and expanded definition

Is that in the expanded people should only show a desire to find

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

Residual
Is the differences between the labour force (EAP) and

formal employment. Job scarcity is the number or percentage of workers without formal employment as a residual.. Underemployment is when the workers are not fully employed. Two types of under employment: Visible and Invisible

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 to avoid trade unions influence by employing large numbers of part-time or casual workers instead of smaller number of full-time workers (casualisation)

Clandestine Employment
Clandestine employment refers to the undeclared

employment of workers e.g. illegal immigrants to avoid social security contribution and other aspects of labour legislation. Invisible underemployment is misallocation of labour as a results of an underutilisation of skill or low productivity, e.g. qualified engineer working as a shop assistance. International Comparison: International Labour Organisation register worldwide labour Statistics.

END

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 indirectly linked to price increases. Inflation is defined as a sustainable increase in the general price level. Index Number is defined as the ratio between the value of a variable or group of variables at a given time or during a specific period and its value at a base time or during a base period X 100.

Index Number
Price Index Number = cost of basket in current year/ cost of

basket in base year x100. An index is a series of index umber with a fixed frequency ( monthly, quarterly yearly). A Specific Index e.g. index of maize production. A general or composite index is obtained by combining variable or specific indices in core index e.g. Industrial production or consumer price Index.

Five basic steps of constructing a general 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 is

referred to as the basket or regimen. The choice items depends on the relative significance of each potential item and its measurability.

Choice of base period

The main criteria used in selecting a base period 1. Base period should be relatively recent the more

recent the base period the more comparable the current figures are. 2. The base period should preferably fall in an economically stable or normal period, because distorted picture could be obtained. 3. Common base period for all indices 4. Censes, survey or sample year are often used as a base period, because comprehensive data are available for the relevant variables

The assignment of weights to the different items

1. The weight has to be assigned to each item

according to its relative importance 2. The importance of each price is determined by the proportion 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 (fisher method)

Price Indices
Composite price Index number is calculated by comparing

the weighted average price of a selected basket of goods and services to the weighted average cost of the same basket in the base year. Explicit price Indices e.g.( CPI and PPI) and implicit price deflators can also be derived from the ratio between nominal (current ) price and real (constant price) magnitudes.

Steps to be taken when constructing a composite price Index

1. Basic selection: A representation sample of goods and services

of items to be included has to be determined.

2. base year selection: International Prescriptions or

recommendations by (e.g. International Monetary Funds and united Nations are frequently the decisive factors. (e.g. 1990,1995 and 2000) are usually chosen and sample surveys to determine the appropriate weighting of the different items tend to be conducted in these years

To facilitate international comparisons common round base year

Price Collection
Questionnaires usually are used extensively in the

systematic gathering of information on prices. 4. Calculation of price index numbers. CPI and PPI are calculated according to the laspeyres formula. Shifting of the base period of an index. This is done simple by dividing each original index number by the year in which the base has to be shifted and then x by 100

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 been

reconstructed on the basis of the new weights. The adapted formula used for constructing price indices as page 11 for formula

Problems associated with price Indices

1. Laspeyres index number tend to be biased upwards 2. there is a problem when the quality of the product

changes. 3. New product 4. Advertised price and actual transaction prices differ. Certain goods are custom- made Price Index is an average.

The Consumer Price Index

CPI is an index of the prices of a representative

basket of consumer good and services. It is calculated 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 a nominal time series or index to a real time series or index. Inflation is opposite of deflating. Current price/ CPI X 100 = constant price

Inflating
Inflating working backward from deflacting Real price x CPI/ 100 = nominal. Cumulative increase: (the last number divided by the first

number)-1) x 100. Advantages of using CPI 1. CPI is explicit price index 2. it is directly calculated and becomes and accurate and reliable

available rapidly

Disadvantages of using CPI

1. It is subject to all explicit price index because it is

based on a fixed base-year weights. 2. it is upwardly biased because changes in consumer expenditure are ignored. 3.Not all consumer goods and services are included 4. the shift from direct tax to indirect tax is reflected in the increase in CPI as tax is included in CPI.

Calculating an inflation rate

The inflation rate preferably should always be annualised ie

be expressed as an annual rate. Month on same month of the 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. The result is expressed as a percentage change .

Calculation of Inflation
Eg December 2004 index of 125,0 compare to

December 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 statistical noise.

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 with the corresponding average for the previous year. Add all the month for 2003 divide by 12 and all month for 2004 divide 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%

Annual Average on annual average

Annual Average on annual average eliminate the

fluctuations in index. Month on the previous month at annual rate. Comparison of particular months figure with that of the immediately preceding months. The ratio of the consecutive monthly figure is obtained