What Is A Philip Curve Economics Essay Example

short-term aggregate supply remain constant. The derivation of the Philips Model involves shifting the aggregate demand curve in this model.

To illustrate, diagram (a) depicts the effects of increased aggregate demand. In 2010, point A represents the economy with a real GDP of $15.0 trillion and a price level of 100. This initial point serves as both the starting point for aggregate demand and short-term aggregate supply.In the economic system, there is a movement from point A to point B, wherein aggregate demand shifts rightward. Point B signifies weak growth of aggregate demand with a real GDP of $15.3 trillion and a price of 102. This coincides with point B on the Philips Curve in diagram (B). Concurrently, robust growth of aggregate demand in the economic system results in point C on the AD-AS model, featuring a higher real GDP of $15.6 trillion and a price level of 105. The correlation between lower unemployment (higher GDP) and higher inflation (price level) is demonstrated at point C on the Philips Curve in diagram (B).

The text explains that in the AD-AS theoretical model, the relationship between rising prices and unemployment is shown by the Phillips Curve. It states that strong growth in aggregate demand represents lower inflation rates and higher unemployment rates. On the other hand, weak growth in aggregate demand represents lower unemployment rates but higher inflation rates. This theory is covered in the text book by Hubbard R.

According to G. et Al (2010), a decline in aggregate demand causes unemployment rates to rise and prices to worsen. Conversely, an increase in aggregate demand leads to higher unemployment rates and increasing prices. Therefore, there exists a short-term

trade-off between unemployment and prices – high unemployment corresponds to lower inflation, while low unemployment results in higher inflation.

The Philip Curve, developed by A.W. Philips, posits a steady correlation between unemployment and inflation. Nevertheless, opposing views from scholars like Milton Friedman argue that this correlation is transitory in the grand scheme of things. They suggest that the link between inflation and unemployment is limited to the immediate future.

According to Friedman, the Philip Curve does not have a lasting trade-off. This trade-off relationship will eventually disappear. To account for this, Friedman introduced the long-run Philip Curve into his theoretical model. The long-run Philip Curve represents the natural rate of unemployment, which is the unemployment rate when the economy operates at its potential GDP. Unlike the short-run Philip Curve that considers expected inflation rates, the long-run curve remains unaffected by changes in inflation rates. Therefore, to best explain economic conditions, we should utilize Friedman's new theoretical model comprising both a short-run Philip Curve and a long-run Philip Curve.

The Phillips Curve trade-off relationships are only present in the short term. The diagram below shows the theoretical model of the Phillips Curve, including both long-term and short-term dynamics.

Malaysia's Phillips Curve over a 20-year period

The mentioned Phillips Curve presents a compilation of inflation rate and unemployment rate data collected over the past two decades, starting in 1982. The graph demonstrates an inverse correlation between inflation rate and unemployment rate. Each year's data displays a unique combination of either high inflation with low unemployment or high unemployment with low inflation. For example, in 1982, there was a recorded unemployment rate of 3.4%, accompanied by a significant inflation rate of 5.69%.

In 200,

the inflation rate was 1.52% and the unemployment rate was 3%, which did not exceed the natural rate of unemployment of 5%. From the data, it can be observed that there is a stable short-run trade-off between the inflation rate and unemployment rate. This is evident from the movement of the curve pattern from left to right, based on the combination of data on inflation rate and unemployment rate collected over the past 20 years in Malaysia.

Do you think that the Phillips curve for Malaysia remains true according to theory?

In my opinion, I believe that the Phillips curve for Malaysia holds true according to theory for certain years, particularly during the 1980s and 1990s, but inconsistent patterns have appeared in some years. However, when plotting all 20 years of data on a graph, the curve still shows a downward trend. The Phillips (1958) curve, which represents a trade-off between inflation and unemployment rates, has long been debated in economic literature. Friedman (1968) added that this trade-off Philips Curve is not applicable in the long run as it is temporary and unintentional. He also stated that there is always a temporary trade-off between inflation and unemployment that exists in the Philips Curve.

In the long term, the relationship of the Philip Curve trade off may not remain consistent due to unpredictable changes in factors leading to both rising prices and unemployment. It is important to note that the temporary trade off is caused not only by inflation itself but also by unexpected inflation. In addition to creating the Philip Curve using data from the past 20 years as mentioned in question 2, research has been conducted on

the stability of the curve in Malaysia. According to a research paper, the presence of a trade off between unemployment and inflation in the Philip Curve suggests that despite industrialization introduced in the 1980s, Malaysia's economy remains demand-driven. Moreover, we believe that this holds true for Malaysia because data obtained from Department of Statistics Malaysia's website on inflation rate and unemployment rate supports the existence of a trade off between these two variables.

The Philip curve of Malaysia accurately represents the correlation between the inflation rate and unemployment rate. The data patterns on the graph depict that when inflation is high, unemployment tends to be low and vice versa.

Classification of Unemployment

In our country, unemployment can be classified into four types: frictional, structural, cyclical, and seasonal unemployment. All these types can occur.

Definition of Structural Unemployment

Structural unemployment occurs when there is a persistent mismatch between workers' skills and job requirements.

Structural unemployment occurs when there is a mismatch between the requirements of employers (such as skills, age, gender, or location) and the abilities of workers. This discrepancy creates new opportunities for skilled individuals. Technological advancement is an example of structural unemployment. Although computers have made certain jobs obsolete, they have also created possibilities for those with computer-related skills.

The constant need for employees to acquire new skills due to the rapid evolution of technology can render old skills obsolete. Even in a robust economy nearing full employment, structural unemployment can still occur. For example, if four workers each take six months off for training in a different field, the unemployment statistics will show two unemployed workers. The main reason behind structural unemployment is a decrease in demand for domestic products

as consumers prefer imported goods found in local markets. If this preference shift is permanent, local manufacturers may reduce production and lay off more workers who are no longer needed. As a result, some of these laid-off workers will become unemployed.

One cause of structural unemployment is the concentration of an industry in a single country, creating challenges for individuals from different areas seeking job opportunities. For instance, industries like shipbuilding and excavation are highly concentrated in certain countries, requiring workers from other regions to undergo lengthy adjustments to reduce the rate of structural unemployment. Chronic or long-term unemployment is another term used to describe this form of unemployment. Typically, developing countries in Asia and Africa experience structural unemployment due to limited capital resources available to meet demand. Laborers in these countries face difficulties as they lack knowledge and skilled workers capable of continuously updating their skills amidst rapid economic growth.

Structural unemployment occurs when there is a mismatch between workers' skills and the requirements of occupations. The proficiency in utilizing engineering technology has become essential for success in our rapidly evolving technological society and addressing concerns related to structural unemployment. In 2009, computer-generated 3-dimensional animation, as seen in movies like Shrek and Up, became more popular than traditional hand-drawn animation. As a result, many highly skilled hand-drawn animators were unemployed due to layoffs at Walt Disney Pictures, DreamWorks, and other film studios.

Unemployed individuals found employment through acquiring computer-generated technology skills or establishing their own businesses. Additionally, the typewriter industry experienced job losses as demand declined. Previously, numerous companies depended on typewriters for operations; however, with the emergence of computers, all employees had to acquire new skills.

Some

workers who cannot accept the change may choose to retire from their current job and seek other employment options.

Cyclic Unemployment

Economists acknowledge cyclic unemployment, also known as Keynesian unemployment or demand-deficient unemployment. This type of unemployment usually arises when many businesses face a decrease in profits and sales. As a result, they reduce production levels and lay off employees in order to withstand the economic downturn.

Cyclic unemployment is caused by an economic recession, which leads to a reduction in overall production and GDP. When the economy is doing well and operating at its full potential, cyclic unemployment is low. However, during a downturn in the business cycle, the economy hits its lowest point and cyclic unemployment rises. This means that there are fewer job opportunities for individuals seeking employment during a recession.

The lack of employer demand is caused by reduced spending and consumption in the economy. Changes in unemployment levels are linked to cyclical economic fluctuations, including recession, recovery, growth, and decline. For example, the housing industry tends to hire more people for construction and sales during busy months and periods of housing booms. Conversely, unemployment rates increase during times of economic slowdown and recession because businesses lay off workers due to lower demand for goods and services, which reduces their motivation to hire new employees. Unemployment resulting from decreased demand for goods and services is inversely related to economic activity. Cyclical unemployment occurs when aggregate demand decreases due to the nation's productive capacity.

In brief, insufficient output occurs when aggregate demand falls below full employment, leading to excessive layoffs. This type of unemployment, known as cyclical or Keynesian unemployment, occurs during economic downturns and can persist

throughout the entire duration of the downturn. Cyclical unemployment is characterized by a negative correlation between Gross Domestic Product (GDP) and the unemployment rate - as GDP increases, so does the unemployment rate.

The economic system's ability to regain control is greatly impacted by this, as a decline in job opportunities results in reduced spending. Additionally, the government boosts its expenditure on welfare and financial aid initiatives to assist the unemployed. Economic recovery is a frequent event but differs among countries during varying business cycles. As a result, this type of unemployment is temporary and will ultimately end when the economy moves away from the business cycle and begins advancing towards economic recovery until it reaches its peak.

Freightliner, the leading manufacturer of trucks and commercial vehicles in North America, faced the need to lay off workers from its heavy truck works during the 2001 recession. Nevertheless, as the economy recovered, the company started rehiring these employees. This situation exemplified the cyclical unemployment encountered by Freightliner workers. It is crucial to emphasize that global trading partners can suffer negative consequences as a result of economic downturns, considering globalization.

The economic recession in the United States has led to a decline in Malaysia's export of manufactured goods, worsening the problem of unemployment in the country.

Industries facing difficulties

Unemployment within struggling industries can be categorized as cyclical unemployment. This type of unemployment arises when industries face bankruptcies and decreased productivity caused by economic downturns and recessions. Moreover, there is a drop in demand for goods and services, resulting in many companies laying off workers and diminishing incentives for hiring new staff members.

During a recession, industries that are struggling and facing

bankruptcy do not require as many employees in order to survive. However, once the economy starts to recover and experiences some economic growth, the industry's depression can be alleviated and they can begin hiring workers again. The duration of cyclical unemployment, which is unpredictable, depends on how long it takes for the business cycle to complete. If wages and input prices are inflexible, the economy may experience extended periods of unemployment in declining industries.

Unemployment in declining industries is caused by a decrease in aggregate demand. Therefore, the government can try to increase aggregate demand without causing inflation by reducing the interest rate. This would help reduce the cost of borrowing and encourage Bank Negara to make loans more easily available, in order to encourage people to increase their spending. Additionally, the government should lower taxes to increase the availability and desirability of goods. Lower interest rates could also lead to increased investment. The government should also provide incentives to encourage companies to engage in research and development activities, which could help them increase productivity.

Finally, the production of goods and services by industries in Malaysia will lead to an increase in net exports.

Unskilled workers

Unemployment among unskilled workers refers to structural unemployment. This type of unemployment occurs when there is a persistent mismatch between the skills that workers possess and the skills required for available jobs. Therefore, with the advancement of technology and the increasing demand for computer skills, older workers without computer literacy may face unemployment. Additionally, addressing structural unemployment among unskilled workers is challenging and time-consuming. It requires balancing the supply and demand for labor, and reducing this type of unemployment can take a

long time as workers need time to retrain and acquire new skills to meet current job requirements.

The unemployment rate in Malaysia is 3%. This is primarily due to structural unemployment. To address this issue, the authorities can implement various schemes such as providing development plans to enhance the marketable skills of unemployed individuals and offering incentives for them to join training programs. The Malaysian government can also establish an infrastructure that provides training in specific areas to meet the demand for skilled jobs. Technical colleges and institutes, like polytechnics, play a crucial role in allowing more Malaysians to enhance their skills and contribute to the labor market. Additionally, the government can provide subsidies to companies to offer training opportunities for displaced workers.

Furthermore, authorities can provide additional strategies to reduce the number of long-term unemployed through community service or working tests. Additionally, encouraging older workers to continue or resume their education would help them develop their skills and adapt to the rapid technological changes in the industry.

Depressed geographic areas.

Unemployment problems that frequently occur among those living in economically deprived geographic areas are typically referred to as geographic unemployment. This type of unemployment is usually caused by the difficulty in relocating from low-demand job areas, also known as depressed geographic areas, to areas with high labor demand. Geographic unemployment can be classified as a form of frictional unemployment due to the lack of mobility of labor from one location to another.

The duration of unemployment of this nature was typically temporary and brief. Improving infrastructure, focusing on industrial development, and facilitating easy movement of people can help alleviate this type of unemployment issue.

Generally, this kind of unemployment is more prevalent in developing countries like Nigeria. In Malaysia, it usually occurs in remote regions where job opportunities are scarce. To address geographical unemployment, various policies such as regional incentives can be implemented by the government. These policies aim to attract new businesses to areas with high unemployment rates and a large working-age population and labor force.

Thus, reducing regional variations in unemployment resulting from geographic mobility would be beneficial. Additionally, authorities should decrease geographic immobility by eliminating barriers to workers' free movement. To achieve this, the Malaysian government should enhance the efficiency of public transportation, such as the LRT or KTM Commuter line, to connect different cities. Consequently, individuals from rural areas can conveniently travel to urban areas in search of employment with the help of efficient public transportation.

Adolescents

Frictional unemployment is a common occurrence among adolescents who frequently switch jobs or seek better employment opportunities. Despite brief periods of unemployment, adolescents are usually prepared and do not remain unemployed for long due to a stable economy and job market. This type of unemployment offers benefits for both employees and employers as it allows individuals to find jobs that align with their skills and knowledge while enabling employers to attract the best talent. The rate of frictional unemployment can vary depending on the time of year and economic conditions.

This type of unemployment, which is typically short-term and temporary, occurs when individuals transition between jobs. For example, after major exams such as SPM or STPM, there is a spike in unemployment as many students leave their jobs to pursue ones that offer higher rewards. To reduce

frictional unemployment among youth and students, the government can implement various strategies. This includes establishing computerized national job centers similar to Jobstreet.com or JobsDB.com, which would provide jobseekers and employers with comprehensive information about job scopes, responsibilities, and company details. Additionally, the government can offer incentives to companies to participate in job fair events where they can find potential employees.

Job fairs can encourage teenagers to explore and become familiar with various professions and industries. Additionally, authorities can introduce apprenticeship programs in educational institutions such as universities and colleges to provide students with early exposure and hands-on experience in their chosen careers. In addition, reducing unemployment benefits and lowering taxes on wages can motivate unemployed youth to actively seek employment by creating more job opportunities and enhancing incentives.