The current unemployment situation in Sri Lanka
Sri Lanka Unemployment Rate is updated quarterly, Unemployment rate increased to 5.80% in September 2020, from the previously reported number of 5.40% in June 2020. The rate of 5.7% in the March 2020 quarter, a level not seen at the end of the 30-year war from 2009, when the unemployment rate in 2009 exceeded 6 percent, according to data from the Government Statistics Office.
Unemployment below GCE A/L qualified persons was 2.7 percent for males and 5.4 percent for females. G.C.E A/L and higher unemployment was 10.1 percent, 5.5 percent for men, and 14.7 percent for women.
INFLATION AND DIFFERENT TYPES OF INFLATION
In simple terms, inflation is a situation where too much money chases too few goods. Inflation means a considerable and persistent rise in the general level of prices of goods and services in an economy over a period.
Inflation has been defined in several ways by different economists.
- According to Keynes, ‘Inflation is the form of taxation which the public finds hardest to evade.’
- According to Samuelson, ‘Inflation denotes a rise in the general level of prices.
- According to Milton Friedman, ‘Inflation is always and everywhere a monetary phenomenon.’
Inflation can be described as a decline in the real value of money a loss of purchasing power in the medium of exchange. When the general price level rises, each unit of currency buys fewer goods and services. In simple terms, inflation is a situation where too much money chases too few goods.
DIFFERENT TYPES OF INFLATION
Creeping Inflation
This is also known as mild inflation or moderate inflation. This type of inflation occurs when the price level persistently rises over a period of time at a mild rate. When the rate of inflation is less than inflation 10 percent annually, or it is a single-digit inflation rate, it is considered to be moderate inflation.
Galloping Inflation
If mild inflation is not checked and if it is uncontrollable, it may assume the character of galloping inflation. Inflation in the double- or triple-digit range of 20, 100 or 200 percent a year is called galloping inflation. Many Latin American countries such as Argentina, Brazil had inflation rates of 50 to 700 percent per year in the 1970s and 1980s.
Hyperinflation
It is a stage of a very high rate of inflation. While economies seem to survive under galloping inflation, a third and deadly strain takes hold when the cancer of hyperinflation strikes. Nothing good can be said about a market economy in which prices are rising a million or even a trillion percent per year. Hyperinflation occurs when the prices go out of control and the monetary authorities are unable to impose any check on it. Germany had witnessed hyperinflation in the 1920s.
Stagflation
It is an economic situation in which inflation and economic stagnation or recession occur simultaneously and remain unchecked for a period. Stagflation was witnessed by developed countries in the 1970s when world oil prices rose dramatically.
Deflation
Deflation is the reverse of inflation. It refers to a sustained decline in the price level of goods and services. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money. Japan suffered from deflation for almost a decade in the 1990s.
EXAMINE CURRENT INFLATIONARY SITUATIONS IN THE SRI LANKAN ECONOMY
The annual inflation rate in Sri Lanka decelerated to 3 percent in January of 2021 from 4.2 percent in December of last year. Price increased at a slower pace for food (6.8 percent vs 9.2 percent) and non-food (1.4 percent vs 2 percent), namely transport, clothing and footwear, recreation and culture, and restaurants and hotels. On a monthly basis, consumer prices went up 0.5 percent. The 12-month moving average stood at 4.3 percent
Headline inflation as measured by the year-on-year (Y-o-Y) change in the National Consumer Price Index (NCPI, 2013=100)1 decreased to 4.6 percent in December 2020 from 5.2 percent in November 2020. This was due to the statistical effect of the high base prevailed in December 2019. Meanwhile, Food inflation (Y-o-Y) decreased to 7.5 percent in December 2020 from 9.4 percent in November 2020, whereas Non-food inflation (Y-o-Y) increased to 2.2 percent in December 2020 from 1.7 percent in November2020.
The change in the NCPI measured on an annual average basis decreased marginally to 6.2 percent in December 2020 from 6.3 percent in November 2020. Monthly change of NCPI recorded at 1.03 percent in December 2020 mainly due to increases observed in prices of items in the Food category. Moreover, monthly changes of the Food and Non-food categories were recorded at 1.02 percent and 0.01 percent, respectively in December 2020. Accordingly, within the Food category, increases were observed mainly in the prices of coconut, vegetables, potato, rice, and red onion during December 2020. Further, year-on-year core inflation increased to 4.7 percent in December 2020 from 4.5 percent in November 2020, while annual average core inflation decreased marginally to 4.1 percent in December 2020 from 4.2 percent in November 2020.
REMEDIAL ACTIONS TO REDUCE UNEMPLOYMENT AND INFLATION
How to reduce Unemployment
As of our discussion, we can see some unemployment types. Therefore, when we consider reducing unemployment, we need to identify what kind of unemployment situation affecting our country. And then we can use the following economic and non-economic solutions for reducing unemployment
How to reduce Frictional unemployment
Reduce unemployment benefits. - Lower benefits will encourage people to take a job quicker. However, it is not clear whether this is desirable. It may encourage people to take a job not fully suited to their skills.
Better matching of labor with vacant positions. - Internet job matching websites have the potential to find quicker job vacancies for the unemployed. If the database is comprehensive for all positions, then workers can more easily see which jobs to apply to. There is a case for the government to undertake a comprehensive job matching service as private-sector competition may diffuse the market.
How to reduce Seasonal unemployment
- Try to diversify the economy. This could be hard to do in touristy areas.
- Regulations which involve paying workers throughout the year, even if work is temporary.
- Government creating jobs in the off-season to improve infrastructure.
How to reduce cyclical unemployment
- Reducing Cyclical Unemployment with Fiscal Policy.
The goal of expansionary fiscal policy is to manage output and employment through increasing government spending and decreasing taxation. Lower levels of taxation lead to higher levels of disposable income and an increase in consumption. An increase in consumption results in higher aggregate demand and higher gross domestic product (GDP). Firms will respond to an increase in demand and higher GDP by increasing production, which requires more workers. Therefore, there will be less cyclical unemployment. Additionally, when there is strong economic growth and higher aggregate demand, there are fewer job losses, because companies remain in business.
- Expansionary Monetary Policy to Reduce Unemployment.
The goal of expansionary monetary policy is to increase aggregate demand and economic growth through cutting interest rates. Lower interest rates mean that the cost of borrowing is lower. When it’s easier to borrow money, people spend more money and invest more. This increases aggregate demand and GDP and decreases cyclical unemployment.
How to reduce Structural unemployment
Policy suggestions to reduce structural unemployment include providing government training programs to the structurally unemployed.
Paying subsidies to firms that provide training to displaced workers.
Helping the structurally unemployed to relocate to areas where jobs exist and inducing prospective workers to continue or resume their education.
How to reduce Technological Unemployment
The main solution for technological unemployment is education. Because we can't stop technological improvements and innovation, therefore labor force should have good experience and education to work with new technology.
Government Job Creation. - when the private sector doing its duty to earn maximum profit using technology, government jobs should be targeting the labor force in the country.
How to reduce disguised unemployment
As a solution for disguised unemployment, we can remove unnecessary workers from a workplace and re-employment them in another place where really wants employees.
Remedial actions to reduce inflation Inflation is a period of rising prices. The primary policy for reducing inflation is monetary policy – in particular, raising interest rates reduces demand and helps to bring inflation under control. Other policies to reduce inflation can include tight fiscal policy (higher tax), supply-side policies, wage control, appreciation in the exchange rate, and control of the money supply. (a form of monetary policy).
In addition, we can use the following economic policies for reducing inflation.
How to use monetary policy for reducing inflation.
Increase interest rate
- Increased interest rates will help reduce the growth of aggregate demand in the economy. The slower growth will then lead to lower inflation. Higher interest rates reduce consumer spending.
- Increased interest rates increase the cost of borrowing, discouraging consumers from borrowing and spending.
- Increased interest rates make it more attractive to save money
- Increased interest rates reduce the disposable income of those with mortgages.
- Higher interest rates increased the value of the exchange rate leading to lower exports and more imports.
How to use Supply-side policies to reduce inflation.
Supply-side policies aim to increase long-term competitiveness and productivity. For example, it was hoped that privatization and deregulation would make firms more productive and competitive. Therefore, in the long run, supply-side policies can help reduce inflationary pressures.
However, supply-side policies work very much in the long term; they cannot be used to reduce sudden increases in the inflation rate. Also, there are no guarantee government supply-side policies will be successful in reducing inflation More details at Supply-side policies.
How to use Fiscal policy to reduce inflation.
Fiscal policy involves the government changing tax and spending levels in order to influence the level of Aggregate Demand. To reduce inflationary pressures the government can increase taxes and reduce government spending. This will reduce Aggregate Demand.
Fiscal policy can reduce government borrowing but is likely to be politically costly as the public dislikes higher taxes and cuts to government spending. This makes it a limited policy.
Direct controls - the government might choose to introduce direct controls on some prices and wages
Public sector pays awards – the annual increase in government sector pay might be tightly controlled or even frozen (this means a real wage decrease). The prices of some utilities such as water bills are subject to regulatory control – if the price capping regime changes, this can have a short-term effect on the rate of inflation
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