The rate of inflation recorded in Canada was 2.1 percent high, a figure higher than any that has been recorded since the 2.4 percent recorded in 2014 and higher than the figure forecasted by the Bank of Canada and by Reuters. Based on the past inflation records, Reuters had predicted a surge of up to 1.6% in inflation while the Bank of Canada had it at 2.0%. However, the rise in gasoline prices has been blamed for the increased inflation. This is because with the surging gasoline prices, citizens have been forced to pay more for shelter as well as for food. The 20.6% jump in gasoline price is the highest that has been experienced since 2011. The price of shelter surged by 2.4 percent while that of food increased by 2.1% from January 2016 to the time of reporting (Reuters).
In spite of these increases, the predictions of the Bank of Canada showed an underlying inflation based on CPI to be below 2.0%. Three measures of the CPI, i.e. CPI common, CPI median and CPI trim were used by the bank to predict inflation. The results however show that all three outcomes were contrary to expectations. For instance, the CPI common, which is considered to be the best for correlating the output gap, gave an outcome of 1.3 instead of the expected 1.4. On the other hand, the CPI median remained to be 1.9% while the CPI trim resulted in 1.7%, an increase of 0.1% from the expected value. The CPI median gives the inflation rates across several key components while the trim gives that inclusive of the low and high outliers. The figure below shows the trends in CPI over the past few years and on which the predictions were based (Reuters).
Figure 1: Canadian CPI over the Years (Reuters)
Analysis (Demand Pull Inflation)
Heakal (par. 4-8) describes the demand-pull inflation as the kind of inflation that results due to an aggregate increase in demand for various products. The products that are used in determination of demand pull inflation are categorized into four types which include businesses, households, foreign buyers and governments. Inflation occurs when these four economic sections compete to access products and services that are in limited supply within the economy. Based on the article by Heakal, demand- pull inflation is characterized by rise in product prices due to increased demand for those products. Contrary to what is experienced in Canada, demand –pull inflation originates from factors such as expansion of foreign economies which increases consumption of export goods; appreciation of local currencies; and reduced government spending. Reduced government spending leads to decrease in taxes; and subsequent increase in the spending power of the citizens. In the case of Canada, the experienced inflation is not as a result of any of the explained factors but due to other reasons. However, some characteristics of the demand- pull inflation such as increased prices of goods and production costs can be linked to the inflation experienced in Canada.
In general, the demand – pull inflation could have been identified through increases in the aggregate demand as a result of the aforementioned factors. This is followed by an increase in the production costs due to strain experienced as companies strive to produce more. The companies then raise product prices in a bid to transfer production costs to customers. This is what is referred to as demand- pull inflation. The figure below shows what is expected in the case where demand- pull inflation exists. In the figure, AD is the aggregate demand, AS the aggregate supply while P is the price of the product.
Figure 2: Demand- Pull Inflation (Heakal par. 10)
Analysis (Cost- Push Inflation)
Contrary to the demand- pull inflation which is associated with economic growth, the cost push inflation is often associated with a reduction in living standards in a country. The cost push inflation results from factors which lead to the increase in product prices that does not result from increased demand. Pettinger (par. 3) describes cost- push inflation as the wrong type of inflation since it indicates this economic down turn. Some of the factors that have been associated with cost- push inflation include rise in oil prices which results in the increase in the production costs of goods and services. An increase in the cost of any of the production factors results in cost – push inflation. These factors include land, labor, entrepreneurship and capital. As the costs of these factors increase, the production costs also increase, leading to the reduction of supply. When this happens, the citizens have limited purchasing power due to the increased costs hence experience inflation. One of the factors that results in incremental production costs is the increase in fuel prices. As the price of fuel increases, the government may be forced to increase fuel taxation in order to cater for the higher costs. As such, the production companies spend more and are forced to inflate product prices in order to maintain their profit margins (Heakal par. 3).
In Canada, the inflation faced can only be described as a cost – push inflation due to various reasons. The main reason however, is that the inflation can be linked to increased gasoline prices as its driver. Other features that are attributed to cost- push inflation include: reduced supply and increased production costs including capital. The figure below can best explain the nature of cost- push inflation as it plays in Canada. The increase in production costs due to increase in oil prices results in the decline of aggregate supply from SRAS1 to SRAS2. As a result, the prices increase from P1 to P2. In Canada, the inflation was caused by high oil prices and resulted in increased food prices as well as increased shelter prices. While the increase in food prices can directly be linked to increase in production costs, increased shelter prices is an indirect impact. As the oil prices increase, the government is forced to increase taxation, not only among the oil users but also among the citizens. As such, the reduction in income results in reduced affordability of shelter. Moreover, the production of building materials may also be costly resulting in higher construction costs and subsequently higher rental and purchase prices for homes. While spending more on food, the citizens are also likely to reduce the amount of disposable income for shelter. The CPI values shown are only an indication of what is experienced in the other mandatory aspects of the economy.
Figure 3: Cost- Push Inflation (Pettinger par. 4)
Dealing with inflation requires an understanding of the type of inflation being experienced in a country. For instance, it has been established that Canada is facing a cost- push inflation that has resulted from increased oil prices. To avert the impacts of this oil price increase, it would be prudent for the Canadian government to increase the purchasing power of the citizens and through it increase the consumption. Currently, the increase product prices have led to reduced consumption and reduced purchasing power. The only way through which this can be accomplished is to create a situation that is somehow synonymous to demand- pull inflation yet with price reductions. Through increased availability of funds, the citizens will be able to purchase higher amounts of goods, and also be able to cater for the costs of shelter. The government could reduce taxation on civilians. To achieve this, there needs to be a government budget surplus before the implementation. Once the surplus is created, the Canadian government can increase the tax paid by businesses, especially those that consume a lot of oil resources. In this way, any budget deficits can be catered for while the citizens have their higher purchasing power. Once the purchasing power increases, there will automatically be a rise in affordability of food and shelter. From the features of cost- push inflation, an increase in business tax will result in the lowering of the GDP. This will result in a shift of the AD curve to the left. A shift of the GDP from Y1 to Y2 results in the lowering of product prices from P1 to a smaller value. In summary, the reduction in citizen taxation could have the following outcomes:
GDP – decrease
Disposable Cash – increase
Consumption – increase
Article 2: Long term Unemployment
In the article by Soergel, the status of unemployment in the U.S is depicted. Unemployment is one of the key social indicators of the economy. As such, it is always important for the unemployment levels in any country to be monitored. In the recent past, the reported rates of unemployment have been reducing, an indication of a growing economy. However, there are postulations, such as those presented by Soergel that the records may not exactly portray what exists on the ground. The rationale for this argument is that although the reported rate is at an all-time low of 4.7%, there are many more people who are unemployed and have been so for a long time. This is due to the fact that the unemployment reports are based on the number of people who have been unemployed and actively searching for employment in the last four months. The number of those who are unemployed rose by higher than 660,000 to reach 94.7 million recently. According to Soergel, the homeless people are often not counted amongst the unemployed. Similarly, those who do not file for unemployment insurance are not covered.
Based on a Harris poll, more than 51% of people who are without jobs have not had any interviews from 2014. As such, they are also more likely to be off the statistical radar. At the same time, some of those who have been looking for employment opportunities for more than two years’ report having given up in their searches. This is indicative of approximately 5 percent of those who have been under prolonged unemployment. In the U.S economy, this is a large population that the country should strive at reducing. The Obama administration made efforts and constantly recorded progress, indicating that the level of unemployment could be more than 9.7%. However, the present president Donald Trump, previously posited that the unemployment rates are high and could be up to 42%, a figure considered to be highly inflated (Soergel par. 3).
From the reports given by various job searchers such as Fugazzie, the government does not seem to be doing enough to ensure that there are more jobs created. For instance, while the Obama administration bragged about doing much, the Trump administration reports on the need to create more jobs but does not clearly explain how this will be accomplished. This is frustrating, especially to job seekers who have now resorted to having their resumes fine-tuned through professional resume writing services. The effect has however not been very significant although some of the members of those organizations have eventually attained employment. In spite of getting jobs, some of the formerly unemployed who opted to help others like them are still continuing with their advocacy efforts against unemployment.
Soergel mentions various reasons why unemployment has continued to be a cancer in the country. For instance, the shifting job market is cited to be responsible for most of the losses. This is because there has been a shift since low wage service jobs and highly technical jobs are the most available sources of employment. Most people on the contrary have skills that are in- between these two extremes hence fail to find places in the current job market. The recession also resulted in the reduction of employment rates and the ensuing reduction in wages (Soergel par. 8). The following chart shows the trends in the U.S unemployment rates since April 2016.
Figure 4: U.S Unemployment Rates (tradingeconomics.com)
Unemployment is one of the inescapable aspects of an economy. According to a report by Pettinger (causes of unemployment), there are various forms of unemployment that can exist within an economy due to various reasons. Frictional unemployment is the most common form of unemployment faced due to lack of perfect information. Those who have just left school and are looking for jobs and those who are in between jobs are said to undergo frictional unemployment. In the case of the U.S, it can be argued that this is the most prevalent form of unemployment, with many people having been out of jobs for prolonged durations. Moreover, most people who are unemployed, just like Fugazzie in the article, have been out of jobs since they were either fired from their last jobs. The difficulty in finding jobs also compounds the impacts of frictional unemployment in any economy.
Apart from this, Pettinger also asserts that structural unemployment may also be dominant in any economy due to changing job structures. For instance, technological advancements, structural changes in the economy and geographic immobility may result in structural unemployment. In the U.S, Soergel reports that structural changes in the job market can also be cited as part of the reasons behind unemployment. Most of the unemployed in the economy fall within the middle level employment positions, which cannot be attained in an economy where highly technical and low wage service jobs are dominant. These structural changes can only be linked to technological advancements which reduce the need for middle level employees while increasing need for high specialty and service jobs.
Additionally, some of the unemployed in the U.S such as Fugazzie experienced unemployment due to recession which led to their being laid off. Such types of unemployment are described by Pettinger (Causes of Unemployment) as being cyclical or demand deficient unemployment conditions. In such instances, various reasons including inflation and recession result in increased production cost. As a result, most companies reduce the labor costs through laying off workers. This however occurs in a deficient economy where the aggregate labor demand falls as a result of negative economic growth and output decline. In either case, the ultimate decision is for the employers to maintain their profit margins by cutting down the operational costs. In some cases, firms may go out of business completely due to the large-scale redundancy levels that may be prevalent during recessions (Pettinger, causes of unemployment, par. 5). Although there have been arguments that demand deficient employment is only short term, evidence from the U.S indicate that such types of unemployment could have long term impacts on those affected.
For instance, Fugazzie, having been laid off during the recession, had to face difficulties which drove him to engage in advocacy against unemployment. In spite of having been employed again after many years, the impacts of the professional gap are still felt by him. Additionally, he reports that wages are still lower than they used to be despite the rise from economic recession (Soergel par. 10). This is an indication that the wage cuts that Pettinger attributes to demand deficient unemployment are long lasting. As a result, workers are likely to work less hard and thus give lower productivity than if they had received wages matching the jobs they do. The reduction in wages further affects the economy since this leads to reduced aggregate demand for products and further increase in the level of unemployment.
There are many other factors that could result in unemployment. Following Pettinger’s work, it is evident that unemployed personnel may be in their situations by choice. For instance, those under frictional unemployment may have chosen to be so until they find better employment opportunities. Moreover, others may consider unemployment benefits greater than the wages they would receive from the service jobs and thus opt to stay on benefits. Others may also choose businesses that generate income instead of getting conventional employment. Regardless of the reasons behind unemployment, the government should find out by sending people through towns and villages to ensure that everyone is sensitized on the need to be productive through employment. Dealing with the menace also requires understanding the reasons for unemployment.
The chart below portrays demand deficient unemployment. As the real GDP declines from Y1 to Y2 due to recession, the demand for declines due to the high costs of production as well as a result of redundancy in firms. The decline portrayed by the shift in demand curve from AD1 to AD2 results in reduction of wages from P1 to P2. Other forms of unemployment may not result in curves which relate to this unless for individual cases.
Figure 5: Demand deficient unemployment (www.economicshelp.org)
The U.S government, while making efforts to reduce unemployment, should first focus on understanding the reasons for unemployment in the country. According to Pettinger, unemployment can result from the imperfect information given by government reports. It is thus recommended that the government should obtain a more accurate report of unemployment in the country to enable planning to be accomplished. While doing this, consideration should be made of the people who have previously been found to be jobless. Through follow up strategies, the government can be able to understand the longevity of citizens in unemployment and also strategize on how to avert the trend. Those who have found ways of survival other than through benefits should be clearly informed of their place in the society. Additionally, those who have been under prolonged unemployment should be capable of reporting the government frequently to enable their progress to be monitored and thus be able to maintain a more accurate database.
The country should also emphasize on the need of an entrepreneurial mind set among the youths. Self-employment is one of the strategies that the government can rely on to increase employment opportunities in the country. However, there is no way that youths can be encouraged to engage in self-employment activities when there are no resources for helping them in this. The government should train youths on talent development and avail resources that they can pursue their interests, albeit on loans and grants. It is only in this way that unemployment can be reduced. On the other hand, dealing with cyclical unemployment may be difficult. This implies that whatever approach may be taken to encourage privatization, the only way the youths could survive through tough economic times is by cushioning. Economic down turns such as the recession could affect youths in small and medium sized enterprises negatively. As such, unemployment appears to be an inevitable phenomenon in any government.
References for Inflation
Thomson Reuters. ‘Canada’s inflation rate spikes to two-year high as gas prices soar 20%, the biggest hike in six years.’ The Financial Post, 24 February, 2017. Accessed from http://business.financialpost.com/news/economy/canadas-inflation-rate-spikes-to-two-year-high-as-gas-prices-soar-20-the-biggest-hike-in-six-years
Pettinger. Tejvan. Different Types of Inflation. Economics Help, 3 December 2013. Accessed from http://www.economicshelp.org/blog/2656/inflation/different-types-of-inflation/
Heakal, Reem. Cost- push inflation versus demand- pull inflation. Investopedia, 3 February, 2017. Accessed from http://www.investopedia.com/articles/05/012005.asp
References for Unemployment
Pettinger, Tejvan. ‘Causes of unemployment.’ Economics Help, 21 September 2015. Retrieved from http://www.economicshelp.org/macroeconomics/unemployment/causes/
Soergel, Andrew. ‘Long Term Unemployment? The economy’s ‘secret cancer.’ U.S News and World Report, L.P., 2017. Retrieved from https://www.usnews.com/news/articles/2016-06-09/long-term-unemployment-the-economys-secret-cancer
Trading Economics. United States unemployment rates. Retrieved from http://www.tradingeconomics.com/united-states/unemployment-rate