How To Manage The Economy With Unemployment & Inflation

Unemployment? Even the Mamak shops are experiencing shortage of workers, with locals shying away from unattractive salary scale

About the writer: Zam Yahaya was a Banking and Capital Market professional by training and a graduate in Accounting, Business & Islamic Finance

From a textbook definition, the goals of economic management is to achieve full employment (in other words, zero unemployment) for its citizen, stability in price of goods especially essential items, a steady growth, redistribution of income and to achieve a healthy and stable balance of payment.

In reality, no country in the world has ever achieved half of these objectives at any given time. Last week I wrote about what is required for managing a strong and healthy economy. Today we see what is required when unemployment and inflation rear their heads.

Academically, full employment means there are still about 3 to 4% of unemployed within the population due to many reasons. Meaning that if the unemployment rate of a country is around 3 to 4%, it can be concluded that full employment is achieved. This is taking into consideration adult students, elderly people, the disabled, those unhealthy to work, housewives and so on. And the rate differs from one country to another due to demographics, culture and social structure.  For example, in a culture where women in general are expected to be housewives and raise the kids, unemployment rate of perhaps 5% is still considered full employment has been achieved.

In Malaysia, for example, if we record an unemployment rate of 4-5% (see chart below) but at the same time having millions of foreign workers doing the job that locals can do, are we considered full employment? The objective of the economic management is not to ensure everyone works but to ensure there is enough job for everyone.

Inforgraphics from Dept of Statistics, Malaysia

Unemployment At Half A Million

The feedback I received from employers early this year is that even though the recorded unemployment were said to be close to half a million, many enterprises find it difficult to get workers for general jobs such as accounting clerks or shop assistants. We can imagine the difficulties in getting workers for specialised jobs.

Take “Mamak Restaurants” for example. Most Malaysians go to these restaurants mainly because they operate till late hours and for the fast service. Of late however, even the service at “Mamak Restaurants” is slow due to shortage of workers. Is the economy not providing enough jobs?

The service at ‘Mamak’ restaurants are getting slower probably due to lack of workers – both foreign and locats. Is there a major unemployment problem in the country then? – Photo credit: The Malaysian Reserve

My regular cat-food shop owner has been complaining to me that he has been advertising to get a shop assistant with no experience and a minimum SPM qualification for RM2,000 a month. After more than a month he is still without a worker. A few came for interview and turned down the salary offered.  As at today, the advertisement banner in front of the shop is still hanging.

Where Are The Locals?

It’s the same thing for e-hailing business. There seems to be a serious shortage of drivers that leads to a hike in charges especially during peak hours. Where have all the drivers gone? Surely they have filled up other jobs. New food delivery businesses are facing shortage in riders too!

So shall we conclude that whatever our country’s unemployment figure is, the economy is providing enough jobs despite the dreaded pandemic that prolonged for more than a year.  In fact, new businesses and jobs were created due to the pandemic. I am sure you can name a few!

My point is, don’t get too overworked with economic figures and jargons. It can be misleading at times and there is no one parameter that suits every country. In fact even in Malaysia, figures of different states tell a different scenario. Economic figures such as unemployment and inflation rate are just guidelines that often not telling the actual situation on the ground.  It can at times be an understatement and at times overstatement.  In a resilient society, one may not be employed but is able to earn a living in many ways.

An Unavoidable Taboo

Now we move on to the second objective, which is about price stability. In brief, managing price stability is mainly managing inflation even though there are other things besides inflation that need to be managed such as wages for example. But the hot topic all the time is about inflation.

Everyone knows in general, what inflation is all about. It’s a taboo word and no one like it. From an academic point of view, inflation means a hike in prices especially essential goods. In certain countries, it is measured through a list of essential goods and services in one “basket” called consumer price index. Similar to the unemployment figures, zero inflation means a normal inflation of 3 to 4% is recorded. But again, in reality, the parameters may vary from one economy to another. 

Unlike employment whereby the economy is capable of providing enough jobs for everyone, inflation on the other hand cannot be avoided except for certain isolated cases such as the prolonged period of deflation in Japan. But that is a topic for another day.

Talking about inflation, prices of goods may inflate due to many factors. It can be due to internal factors of which could be controlled by the government through short-term measures as well as medium to long-term policy.

Internal factors include a hike in demand, a shortage of supply, an increase in overall purchasing power and so on. We cannot expect a robust growing economy, a full employment economy and a sudden hike in wages and at the same time prices to remain the same. In other words, inflation goes hand in hand with growth and purchasing power.

An example of external factor is foreign exchange rate. If we rely too much on imports for essential items, any slight weakening of our currency with the corresponding trading partners (our exporters) will result in a price hike. Therefore Singapore, which relies almost 100% of its essential items on imports, has to maintain a strong currency at all times. In other word, its inflation rate is closely related to even a slight change in its currency value.

Malaysia on the other hand has quite a balanced situation whereby our currency has to be managed so that it will not appreciate or depreciate in value abruptly since it will affect our import if it weakens too fast and will affect our export if it strengthens too fast. Therefore, contrary to misconception of some people, the function of our central bank is not always to strengthen our currency but to ensure its stability and protecting it from speculators and control it as much as it could to accommodate for trade purposes.

Short-term Measures

An example of external factor is the price of chicken in our country recently. The cost of producing chicken has increased due to price of chicken feed. Price of chicken feed increased due to shortage of its main component, which is corn and shortage of corns was due to the ongoing war in Ukraine that started about four months ago, among other things.

So this hike in price of chicken for example has no direct relation whether the economy is being managed well or not. Nevertheless, a medium to long-term policy is required such as food security policy has to be in place, learning from the ongoing war and the recent pandemic. As policies require time to plan, implement and achieve the results, certain governments are adopting a short-term measure.

In Malaysia for example, the short-term measure was to allow imports of chicken and a few other food items without strict control. But such measures cannot be implemented longer than it should since it will have a very negative impact on local producers. Since the price of chicken feed is at a level where producers will make a loss selling at a controlled price, they will stop producing eventually. The government on the other hand cannot provide subsidies to either the consumers nor the producers just to control the price of chicken since any expenditure that is not budgeted will put a constraint on the government’s coffer as well as constraining other sectors such as education or healthcare. Therefore, the government has decided to let the market determine the price and that leads to inflation since a hike in price of chicken leads to a hike in other daily consumption too!

Conclusion is, there is no country that is able to control inflation but at the same time trying to achieve both full employment and steady growth.  Economic policies and measures as described in a Malay proverb is like a “selimut pendek” or sleeping with a short blanket. If you cover the face, mosquitoes will bite your legs and if you cover the legs, the pesky insects will suck the blood on your face. At times, we have to curl ourselves to sleep with a short blanket. In economic terms, it explains that resources are scarce. If you use the available resources for a purpose, you will have to forgo another need.

For example, in a scenario where the government has RM50 million and has to choose between building a bridge and a school. If the government chooses to build a bridge, the opportunity cost for building the bridge is the school. In this case, the need of addressing the importance of building the school is simply being pushed forward.

It’s the same for any other long-term policies and short-term measures. Whatever decision made is simply sacrificing other economic or social needs. Therefore in reality, economic problems are not meant to be solved but a set of ongoing issues to be managed from time to time.   

What we should be worried of is not so much of an occasional high inflation but stagflation. We will discuss this next week while let us have a productive week ahead! – New Malaysia Herald

About the writer: Zam Yahaya was a Banking and Capital Market professional by training and a graduate in Accounting, Business & Islamic Finance and is a columnist with NMH. The points expressed in this article are that of the writer’s and do not necessarily represent the stand of NMH.

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