Download Employment and unemployment

Economics of Employment and unemployment
from the Islamic Perspective
IDsB/IRTI
Video-Conferencing DLP
Introduction
• The importance of employment economics cannot be overstated –
employment is the immediate means of livelihood in human
societies.
• Unemployment, on the other hand, is the gateway to poverty and
social unrest - unless it is aggressively attacked through appropriate
policy.
• Nonetheless, employment economics in the Islamic perspective has
remained overshadowed by research in Islamic banking and
financial economics – why?.
• Admittedly, riba elimination lies at the heart of Islamic economics,
whereas Islamic labour contracts are similar to their mainstream
counterparts.
• Yet, riba elimination should be viewed as an integral part of an
equitable macroeconomic strategy that takes full employment
targets and job security as top priorities.
• More research is needed to project riba elimination into practical
employment strategies.
Introduction
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The objective of this lecture is to shed light on salient
theoretical features of free market labour economics
with relevant Islamic implications.
Due to time constraint, attention will be focused on the
impact of riba elimination on employment although there
definitely more about employment from an Islamic
perspective.
Again, we cannot introduce all real and monetary
macroeconomic variables that affect the theory of
employment.
Two models will suffice for the current objective:
1. Neoclassical equilibrium model of the labour market
2. Kenynesian model of labour market disequilibrium.
Basic definitions
• Adults in the working age are normally classified
three broad groups as
– Employed (E)
– Unemployed (UE)
– Not in the labour force (NLF)
• Hence, the Labour Force (LF) consists of E+UE
• LF Participation Rate at any point of time is the
percentage of the population of working age who
declare themselves to be in the LF
• In practice this may not be an adequate
measure of the true situation PR in the labour
market.
Types of UE
• Frictional UE: an irreducible minimum level of UE in a
dynamic economy = people in shifting times between
jobs.
• Structural UE: caused by changes in the structural long
term pattern of demand and production – thereby
affecting mismatch of skills and job opportunities.
• Demand-deficient UE: This is the Keynesian UE
where actual aggregate demand falls short of the full
employment aggregate demand – wages and prices
have not yet adjusted to restore full employment.
• Classical UE: where wage rates are held artificially
above the full employment equilibrium – trade union
power or minimum wage rate legislation.
Model- I
Neoclassical Equilibrium model
• The first model measures represents real wage (w) on
the vertical axis and number of workers (N) on the
horizontal axis.
• Then the following schedules are drawn:
• Labour Demand (LD) schedule: firms takes on more
workers at lower wages.
• Labour Force (LF) schedule: workers willing to be in the
labour force at each real wage ( upwards sloping).
• Workers Accepting Job offers (AJ) : this schedule lies to
the left of LF because some LF members are between
jobs and that some optimists hang on for an even better
wage rate.
Model- I
Full Employment and the Natural rate of
Unemployment
• Full employment level is the equilibrium level
(Nnatural rate of unemployment (ne) is the
difference N1- N*
• Thus *) at real wage rate ( w* )where LD
intersects with LD.
• The size of LF at this equilibrium is N1.
• The, the natural rate of unemployment is the
rate of unemployment when the labour
market is in equilibrium.
• This is entirely voluntary- including frictional
unemployment and structural unemployment.
Model- I
Involuntary Unemployment
• Suppose trade unions maintained the real wage
rate at w2 well above the full employment wage
rate w*.
• This depresses employment level to N2 and
unemployment now becomes bigger N2- N1
• Individual workers willing to work at w2 cannot
find work – therefore this is involuntary UE.
• Yet, from the viewpoint of workers’ collective
action, this is voluntary UE- the classical version
of voluntary UE.
Neo-classical equilibrium model
Full employment, the natural rate of
UE and the interest rate
• Movement along the LD depends on real wage,
but the position of the LD depends, among other
things, on the rate of interest.
• A rise in the interest rate causes LD to shift
backwards towards the origin – reducing N*
• A fall in interest rate causes LD to shift forwards
– raising the level of employment
• Hence, in an interest-free economy, more labour
force will accept job offers and fewer workers will
be ‘naturally’ unemployed.
Employment and natural UE in an
interest-free economy.
Model-II
Keynesian demand deficient UE
• The Keynesian theory is a disequilibrium model
of involuntary unemployment – the economy has
not fully adjusted to the new level of aggregate
demand.
• The basic model consists of
• 45-degree Aggregate Supply curve:
– Aggregate expenditure = aggregate income.
• AD = Aggregate Demand function
Private consumption ( C ) + private investment (I0)
• Income level ( Y0 ) is below the full employment
income level.
Model-II
Keynesian Demand-Deficient UE
Model – II in an interest free
economy
• Investment expenditure in inversely related to
the interest rate
• Hence, a rise in the interest rate will reduce
investment and hence aggregate demand,
leading to an even lower level of output.
• Conversely, in an interest-free economy, rise in
investment will recover the deficient aggregate
demand towards full employment.
• Compare The impact of I1 with that of I0
Model-II in an interest-free
economy