Topic 1: Underemployment and Unemployment

Unemployed refers to the category of people who are above the minimum age, and are without a job, are currently available and are seeking a job. Besides, these groups of people do not have a job, but they are willing to work at the prevailing wage rate (Baumol & Blinder, 2009). An example of an unemployed person is one who is temporarily laid off from the job, but he/she expects to return. Conversely, underemployed refers to all individuals in paid or self-employed who do not get the kind of work they are capable of doing though they have the required skills to yield larger income, but they are denied the opportunity to deliver because there are no suitable jobs. Similarly, the situation occurs when the laborer works for less than normal duration (Baumol & Blinder, 2009). For example, a degree holding engineer who wants a good job but he/she starts as an operator.

In the case of an individual, the economic cost of unemployment is lost income. Similarly, due to unemployment the society will incur the cost of a decrease in goods and services. On the other hand, with underemployment, there is underutilization of skills and time thus reducing the performance outcome and productivity level. Unemployment poses a serious threat to the economy because laborers are willing to work at the current wage rates, but they do not find the job. Therefore, there is slower growth and loss of output due to unutilized resources.

The government can address underemployment by enacting a tax policy that will attract private investors who will create better quality jobs for the working population. Similarly, the government can deal with the situation by imposing subsidies for hiring the disadvantaged.

The various forms of unemployment include the following. First, frictional unemployment is one that arises due to the normal turnover in the labor market. Second, structural unemployment arises in situations when workers lose jobs due to changes in the economy. Third, cyclical unemployment is attributable to the decline in economic activities due to a recession (Baumol & Blinder, 2009). It is difficult to solve structural unemployment because it reflects the gap that exists between worker’s skills and what the employer demands. Therefore, a worker with low skills experiences a hard time finding jobs.

Topic 2: Cost of Inflation

One problem that inflation causes is uncertainty. When inflation is unexpected or fluctuates, it decreases the confidence of the consumer or business. I encountered this problem when I was operating my small business. I implemented the production of a new product expecting a low inflation; however, fluctuation in inflation rate resulted in large losses and reduced consumer confidence.

The costs of inflation include reduced international competitiveness. When a country experiences high inflation, its goods become less competitive leading to a fall in export (Janjigian, Horan & Trzcinka, 2011). Second, inflation causes uncertainty thus making it difficult for individuals and firms to plan ahead. Costs of deflation include an increase in the value of real debt and the issue of deflationary expectations.

Policymakers need to tame inflation (deflation) to stabilize prices because once deflation occurs it is hard to cure. Deflation can paralyze the economy and if prices fall revenue of firms that produce good and service reduces. Firms would need to cut costs to remain profitable, and this would lead to layoffs and pay cuts.

Inflation becomes a problem when the prices increase quickly by a larger percentage. In such situations, the prices of goods and services become unaffordable to individuals with fixed-income. Similarly, the high inflation would cause economic instability, and people would be afraid to spend money (Janjigian, Horan & Trzcinka, 2011).

References

Baumol, W. J., & Blinder, A. S. (2009). Economics: Principles and policy. Mason, OH: South-Western/Cengage Learning.

Janjigian, V., Horan, S. M., & Trzcinka, C. A. (2011). The Forbes/CFA Institute investment course: Timeless principles for building wealth. Hoboken, N.J: John Wiley & Sons.

 
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