The True Fact about Phillips Curve in Indonesia

Almost all of countries in the world have various economic problems. There are so many economics problems that connected with the progress of the economic growth in a country. There is no country havent economic problem. In this case, I will share about my point of view about one of economic problem. That is unemployment. Unemployment is like a permanent disease for economic part in every country in the world. Permanent disease in this case means that unemployment always be a part of shadow that created by the progress of economic growth. Until now, unemployment is a unique problem because there are not effective policies that can cut this problem to be zero (full employment). All of economists are trying to search the best policy to face this problem, but no policy that can make this problem disappear from the progress of economic growth. This fact is connected with the natural unemployment (frictional unemployment) because every human (in this case is worker) wants to be better and have a better job than previous, so were always search the best one until we are comfort with that job. (It was taken from Milton Friedmans theory about natural rate of unemployment) As we know, Phillips curve is a way to analyze the progress of unemployment. Phillips curve is created by A.W. Phillips. A.W. Phillips as a founder of this curve was famous when he wrote his great book. The title of his book was The Relation between Unemployment and The Rate of Change of Money Wage Rate in the United Kingdom. This book was famous because A.W. Phillips could explain the relation about inflation rate and unemployment in UK. Until now, Phillips curve always use the relation between the inflation rate and the unemployment to search the progress of unemployment.

Between the inflation rate and unemployment must be have a temporary trade-off. Theres no permanently trade-off. Temporary trade-off is not only from the inflation rate, but its because the inflation that not anticipated. (Milton Friedman)

The nearest theory that connected with this case is about aggregate supply. So, we must know about aggregate supply to make us understand about the Phillips curve. Generally, there are four models to analyze the fluctuation of aggregate supply. There are: 1. 2. 3. 4. Sticky - wage model Worker - misperception model Imperfect - information model Sticky - price model

(These are was taken in N. Gregory Mankiws book fourth edition) From these models, I take the first model, because the first model is very suitable for me to explain the relation between inflation rate and the unemployment. Sticky wage model shows us the rigidity of nominal wage that can affect the aggregate supply. Many policies of companies pay their workers with minimum wage. It means that the minimum wage that has been paid by the companies is not suitable with the newest condition of economics. So, this diagram will show the effect of sticky wage model.

If the nominal wage doesn't change, the increasing of price level will decrease the real wage, which makes cheaper workers

The decreasing of real wage will have a company to recruit more workers.

Additional workers will produce more products. Finally, it raises the aggregate supply from the companies Now, inflation rate in short period can activate the economic progress through increasing of total output! In this condition, Phillips curve is true. Phillips curve can show us the negative relation between the inflation rate and the unemployment. Increasing price will push the number of unemployment lower, but always remember that this curve is useful and appropriate for short period. Trade off in the economics of short period must be happen. Indonesia has it, too. If the policy makers enhance the aggregate demand, it will boost the economic progress and make the number of the unemployment lower. But, theres still a problem, the inflation rate will increase quickly. If the inflation rate cant be solved by the policy makers, it will affect the stability of economic, especially in Indonesia. The increasing of inflation rate can boost another economic problem. The example is the decreasing of real value in Rupiah currency. In the other hand, if the policy makers push the aggregate demand lower, it will push the unemployment rate increase. This case will affect Indonesia and it will be a serious problem because the economic growth is depends on worker or labor, too. If we are talking about the correlation between Phillips curve with the situation of economic in Indonesia, we must analyze first. Based on the theory that I used before (sticky-wage model), its happen if the country has a less number of labor force. We must consider that Indonesia has a high rate of labor force. The impact of increasing price level just affect a little bit of the unemployment rate.

Although so many of firms want to have more labor force, its not a big hope to decrease the unemployment in Indonesia because Indonesia has a high rate of labor force. As policy makers, we must see the characteristics of the labor force in Indonesia. In Indonesia, there are so many labor force has a lack of abilities. Its dangerous for our country, because the firm needs the great labor, not the bad one! Phillips curve show us the unemployment will decrease because of the increasing of price level push the firms need more labor. The fact in Indonesia, the firms are not directly got the labor that they wanted. How to solve it? In my point of view, there are two effective ways. First, make the labor force in Indonesia better. Unemployment cant be solved if the quality of labor force is worst, then we think about the relation between inflation rate and unemployment. Second, Im sure that inflation targeting framework from Bank Indonesia is useful for Indonesia to solve this trade- off between the inflation rate and the unemployment. When the policy makers are trying to enhance the progress of aggregate demand, Bank Indonesia will prevent the inflation rate goes too far. It will balance the stability of economic in Indonesia. Stability of economic is the most important to maintain the progress of economic better.

My Opinion for IUP FEB UGM and IUPs Essay Contest IUP FEB UGM has a lot of innovation to enhance the students skill, especially in economic. Now, economic is an important subject for us as student. I learn a lot of knowledge from them, especially from the National Competition of Economic. I can learn and enhance my analytic skill from this, and this is so important to prepare and build myself to be ready to face this globalization era. IUPs Essay Contest is a great innovation from the committee of FSDE 2011 to enhance and increase the knowledge of the participants. IUPs Essay Contest can be a great way to build the students, not only the abilities to know about economic subject, but also this contest will improve the writing skill of students (English). Although I have a lack of ability in English, but I dare to try and hopefully, from step by step I can finish my essay and improve my skill in writing. Thanks so much, guys! :D