INFLATION

Inflation is a situation where there is a persistent rise in the general price level of goods and
services in the economy. The general price level refers to average price in the market.

At this time the value of money is persistently falling

X-tic Features of inflation

1. Increase in the supply of money

2. Increase in the general price level
3. Decrease in the value of money (scarcity of goods and service)
4. High demand for goods and services
5. Increase in the cost of living le high prices in the market
6. Decrease in standard of living
7. Increase in money wages / appreciation
8. In salary amount
9. Decrease in real wages i.e. the increased salary now buys less than before
Categories of state inflation

Inflation can be classified according to state and cause. State of inflation means the speed at
which prices keep changing during inflation. It is thus the degree or intensity of price
changes.

1. Mild / creeping / gradual inflation

This refers to a state of inflation when the general price increase is slow / gradual. It is
not easy to notice the rise

The annual increase in the general price level is less the 3%. It encourages production and
it does not distort relative prices or incomes severely.

2. Walking / trotting / moderate inflation

This is where the increase in the general price level is less than 10% per annum. It is a
warning to the government to put measures to control it before it goes out of hand

3. Running inflation

This is when prices increase at a rate of 10-20% per annum. It requires strong measures
to control it.

4. Hyper state / galloping runaway inflation

This is a rapid increase in the general price level where inflation ranges from 20% to even
more than 100% per annum. Inflation becomes uncontrollable and prices increase many

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 times every day Money loses value and people prefer to hold real goods / Assets than
money.

CLASSIFICATION OF INFLATION ACCORDING TO CAUSES

1. Demand pull inflation: This occurs when aggregate demand exceeds aggregate supply at
current prices and at full employment level of the economy so that prices keep rising or
pulled up wards. Demand pull inflation is sometimes described as a situation where there is
too much money chasing for few goods .The demand exceeds the supply of goods a situation
mainly caused by too much money in circulation
2. Cost push inflation: It is a type of inflation which originates from the supply side. It is a
situation where by rising prices are initiated by the rising costs of production. i.e. prices are
pushed up by increase in the factor prices (cost of production) e.g. rising wages transport
expenses, raw materials, indirect taxes etc. The increase in costs of production is shifted to
the consumers in from of high prices

Forms of cost push inflation

Price- wage (spiral) inflation: This occurs when increase in commodity prices leads to the
workers demanding high wages to meet the high cost of living. When the original increase in
price is brought about by entrepreneurs aiming at high profit margins, we have profit push (mark
up) inflation

Wage- price inflation: This occurs when workers demand for high wages through their trade
unions or demand for an increased share of out put produced. The increase in wages leads to
increase in cost of production and increase in prices

Wage- wage inflation: occurs due to inter – firm or inter sector comparison of wages among
workers. An increase to wages in one sector or firm will cause upward revision of wages to
similar occupations in the economy. As entrepreneurs increase wages, total cost and prices also
increase

3. Structural / Demand Shift Inflation

This combines elements of demand pull and cost push inflation. It occurs when there is a change
in the structure of demand e.g.

a. In a situation where some industries are expanding while others are declining if factors of
production cannot be easily moved to productive sectors. High wages have to be paid to
attract F.O.P to expanding industries
b. Increase in population. May result into increase to prices of foods, increase in wages and
increase in the general price level
c. When a country devalues its currency to improve on its BOP positions , prices of imports
may increase

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 d. Scarcity / bottleneck inflation. This is due to supply rigidities due to break down in some
sectors e.g. failure in agricultural production due to weather vagaries, pests etc. Also due
to fall to supply due to wars, collapse of import supplies etc.

4. Imported inflation: This type of inflation arises from importing goods from countries that are
already experiencing inflation.

This means that a country imports other countries inflation in the form of higher prices for
imports e.g. high prices of petroleum products oil leading to high costs of transport which may
affect all other sectors of the economy leading to general price increases

5. Expectation inflation: When prices increase, seller increases them more and buyers accept to
pay the high prices because they expect future increase in prices. It is also due to the
announcement effects e.g. when increase in salaries is announced over the radio sellers increase
prices immediately.

6. Monetary inflation: According to the monetary economists inflation is caused by the increase
in the supply of money. From the quantity theory of money and the fishers equation of exchange
MV = PT for P = MV

Therefore increase in M (stoke of money) would lead to increase in p (general price level)
assuming V (Velocity of money circulation) and T (level of transactions) are constant.

7. Suppressed inflation: Is a situation where demand exceeds supply but the effect on price is
minimized by price control and rationing price control suppresses other causes of inflation.
Excess demand persists and will tend to show itself in the form of waiting stagflation lists,
queues; Blacker markets etc.

Thus suppressed inflation refers to a situation where price controls are holding down the price
when inflationary tendencies are presents in the economy e.g. when aggregate demand is greater
than aggregate supply the government can suppress inflation by use of rationing, price controls,
reducing import demand, increasing domestic production etc.

Suppressed inflation can lead to black markets, computation, hoarding etc which may require
costly extra legal controls.

NB Stagflation:It occurs when there is both inflation and depression. It is caused by a decline in
aggregate supply which leads to decline to o/ps unemployment due to lying off workers and
inflation due to shortage of commodities. It is a period of unemployment unit increase in prices
of commodities.

Deflation: This refers to acuminous fall in the general price level

Open inflation: This is when inflation cannot be suppressed. I.e. the market mechanism is not
interrupted. There are no controls or checks on distribution of commodities by the government.
Open inflation can lead to hyper.

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Inflation spiral: This is a situation in which a persistent increase in prices leads to a increase in
the cost of living and a demand of higher wages by the workers to preserve their standard of
living. Once the wage increase is effected, the prices of goods and services rise further leading to
further increase to cost of living and more demand for upward adjustment and the process
becomes continuous without on end . This situation occurs when there is inflation in the
economy agents try to protect themselves from the negative consequence of the initial price rise ,
but in so doing they instead worsen the inflationary conditions.

GENERAL CAUSES OF INFLATION

Inflation occurs when aggregate demand exceeds aggregate supply. Therefore it is caused by
factors which increase aggregate demand and factors which reduce aggregate supply.

1. High production costs which arise from high costs of raw materials, fuels, high levels of
taxation, high interest rates etc.
2. Natural factors e.g. floods, drought cause decrease in production level
3. Increase in money supply over the real national product. This may be due to ways and
means (borrowing from the centre bank) of financing.
4. Increased government expenditure especially on non-
5. High marginal propensity to consume due to low incomes. This leaves little money saved
and reduces the volume of goods
6. Political instability: increases government expenditure and also leads to reduced
production leading to inflationary tendencies
7. Continuous increase in population at high rates which leads to increased aggregate
demand with limited supply of commodities.
8. Importation of goods from countries experiencing inflation
9. Capital inflow from abroad: projects with heavy foreign exchange components result into
large sums of money in circulation which is not barked by the production of goods and
services in proportion.
10. Hoarding due to speculation by businessmen causes a shortage in the market supply there
by influencing the rise in prices of commodities.
11. The power of trade unions and NGOS over wage legislation.
12. Internal debt repayments when government pays the publics’ money in public hands
increases aggregate demand.
13. Presence of monopolies. Monopolies restrict output so as to sell commodities at high
prices.
14. Shortage of factors of production. Shortage of land, labour, capital and entrepreneur leads
to increased cost of production due to increase in rent, wages, interest and profit margins
of traders.

EFFECTS OF INFLATION
Positive effects

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 1. Mild inflation encourages production (hand work and effort) in order to meet the high
cost of living. Individuals are encouraged to work hard in order to maintain their current
living standards
2. Mild inflation stimulates investment and profits on productive sectors .This increases the
producers profit which boost the level of investments in the economy
3. Inflation increases government revenue through increased taxation on expanding tax base
4. GDP growth: It stimulates economic activities leading to expansion of GDP
5. Growth of import substitution of industries because of the need to avoid imported
inflation, Establishment of import substitution industries leads to self reliance of the
economy.
6. Increased labour mobility. Labour becomes mobile both geographically and
occupationally in search for high paying jobs in order to earn a living
7. Forced saving: During times of inflation, people receive incomes which cannot buy any
reasonable amount of goods. They are therefore forced to make savings by accumulation
of incomes which cannot buy anything substantial at once
8. Creation of employment opportunities some jobs are created by the entrepreneurs who
invest in order to take the advantage of rising profitability in the economy.

Negative Effects
1. Inflation discourages savings: People are discouraged to save in financial institution
because of fear that their money would lose value. For institutions are forced to increase
interest rates and this increases cost of borrowing and leads to further inflation
2. Inflation leads to BOP problems by discouraging exports and encouraging imports.
Countries dislike to buy from a country at high prices and as such they prefer to sell to a
country where high prices exist
3. Inflation undermines the external value of the currency which calls for devaluation of the
currency .This makes the importation of raw materials difficult.
4. Hyper inflation discourages production and encourages speculation large scale industries
cannot be constructed as they take long to be completed and may fail due to inflation.
5. Leads to income inequality when inflation gets one of control, it usually results into
inequality in income distribution
6. Rapid inflation reduces the ability of money to perform its functions .This means that
during rapid inflation money will cease;
a. To act as the medium of exchange
b. To acts as units of account
c. To acts as a store of value.
This is because during inflation money loses value very fast
7. There is a tendency of inflation to promote rural urban migration in LDCS. This is
because at time speculation is best paying and it mainly takes places in urban areas
8. A fall in the standard of living of fixed income earners like pensioners as the cost of
living increases due to increase in prices

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 9. Inflation may lead to dumping where another country makes a country with inflation a
dumping ground for unwanted goods
10. Rapid changes in prices make planning by the government very difficult. In most cases
the rate of inflation after a given time is very difficult to predict.
11. Inflation can create social tension and this may result in to political instability
12. Increase in costs of production especially wages can investors to use more capital
intensive techniques have an effect on employing few labourers at the expense of using
more machines leading to creation of unemployment.
13. `Under the case of hyper inflation foreign investors can decide to leave the country
resulting into shortages of commodities. Capital onto flow and creation of unemployment
problems since most of the industries may be caused to close do.
14. Miss allocation of resources to nonprofit able sectors may occur. Such sectors can
become economically hit when structural changes appear e.g. introduction of new types
of commodities new fashion etc.
POLICY MEASURES TO CONTROL INFLATION

Policies for inflation are mainly macroeconomic policies which aim at stability, efficiency and
fair distribution of wealth. A policy for inflation depends on the cause of inflation.

Policy instruments should reduce aggregate demand and increase aggregate supply.

MEASURES THAT CAN BE USED TO CONTROL INFLATION INCLUDE:

a) Fiscal policy measure: This deals with the use of taxation. During inflation;
 Increase taxes to reduce disposable incomes hence control demand
 Reduce government expenditure so as to reduce money in circulation
 Make a surplus budget where the government collects more revenue than its expenditure.
b) Monetary policies: There are four major measures that the government can employ to
control money in circulation,
 Bank rate – central bank raise the bank rate as such commercial banks are discouraged from
borrowing from central bank. This limits the amount of money available for lending by
commercial banks to the public
 Open market operation(OMO): Government can sell securities like treasury bills to the
public to get money from the public hence reducing inflation (contractionary policy)
 Variable reserve ratio: The government tries to instruct banks to vary their cash and liquid
ratio. Bank should / will increase cash ratios and decrease liquid ratios.
 Selective Credit Control: this is where the central bank instructs or directs commercial
banks to be selective in their lending policies to only approved priority sectors e. g
Agriculture, Industry or for importers of essential commodities.

c) Price Policy: Prices of various commodities can be controlled so as to reduce persistent rise
in price levels which leads to inflation, However in the short run, price controls may cause
black markets and force the prices to raise further wage control / income policy

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d) The level of wages when controlled through budgetary means can decrease wage –wage
inflation
e) Production policy: This involves provision of subsidies to producers using scarce inputs to
produce scarce commodities, removing bottle necks, improving transport and markets etc.
f) Import policy: Importation of luxuries can be reduced and importation of essential goods is
maintained. This limits the imported of imputed inflation by way of luxury import
commodities. Import duties on scarce commodities be reduced and those on luxuries be
raised
g) Export policy: This includes limitation of exports of scarce commodities through increases
of export duties. This leads to increased supply of scarce commodities in the domestic
markets leading to fall in prices.
h) Foreign exchange should be availed to sectors producing scarce essential commodities. This
makes money in circulation to be limited thus reducing inflationary tendencies
i) Population policy: One of the causes of inflation is sudden increase in the population growth
rate followed by a reduction in the volume of production. The commodities available for
consumption as a result become scarce and their price raise thus aiding inflation.
j) Inflation policies available for reducing population growth rate include; family planning,
Monogamy, Long time of education.

Other measures to control inflation.

1. Controlling the activities of trade unions and NGOs so that wage increases by their actions
are controlled most of the NGOS inject a lot of money into circulation by way of high wages
given to their employees.
2. Debt conversion i.e. from short term to long term
3. Reduction in workers high allowances and other in-kind payments which may involved
increased government expenditure
4. Privatize and liberalize production and trade so as to increase the amount of commodities in
the economy which end up reducing the general price level
5. Use of physical policy: This involves the use of force and freeze policy
6. The public can be forced to save through buying some physical asset owned by government
freeze policy involves closing accounts of certain individuals’ especially political dissidents
or those governments is not certain on how they got the large sums of money this reduces
money in the hands of the public.
7. To control RUM, small scale industries should be established in rural areas. This can create
employment opportunities, social facilities like roads, schools, and hospitals can improve
upon life in villages thus reducing RUM and consequently inflation.
8. The government can also establish a sinking fund when making fiscal budget. This can be
used for purchasing relief commodities when structural changes like drought, floods take
place
9. Reorganization of distribution channels of goods. For examples rationing of scarce
commodities and nationalization of major distribution channels e.g. foods and be averages.
Also government can establish buffer stocks during times of plenty and release the supplies
to times of scarcity.
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 INFLATION IN UGANDA

Inflation in Uganda started in 1960’s and become severe in 1970’s especially due to increase in
price of oil, manufactured goods and other exogenous factors. The situation continued during
1980’s due to shortages, increase in money supply, political instability, deficit financing,
expectations, high price of import low tax collection devaluation and corruption.

Major types of inflation in Uganda

 Demand pull inflation

 Cost push inflation
 Imported inflation
 Price push inflation
 Price wage inflation
 Expectation inflation
Wage – wage inflation
Wage – price inflation
Structural / bottleneck inflation

Policy measures taken by government to control inflation in Uganda

The government carried out various policies directly and indirectly to try to reduce inflation and
control it at a low level. This has been done through the following.
1. Government has reduced taxes on essential commodities both consumer goods
and raw- materials
2. Government has improved on the social infrastructures such as roads and
communications and this has helped in the easy transportation of commodities
from areas of supply to areas of demand.
3. Government has liberalized trade which has led to increase in the supply of
commodities in the country
4. Government has encouraged the establishment and expansion of local industries
which have helped in stabilizing the supply of commodities
5. Government has reduced its borrowing from central bank and encourages
ministries to use their estimated budget sparingly.
6. Government has continued to sell securities such as to treasury bills and bonds.
These helped to reduce money in circulation.
7. There has been deliberate delayed payment by government to give supplies and
this has reduced money in circulation.
8. Government has controlled incomes at low levels of the majority workers
especially civil servants and this has affected the purchasing power of the people.
9. Government has reduced it’s expenditure on van ions unproductive ventures by
practicing unprofitable investments and also reducing on government expenditure.
10. Government has generally encouraged the private sector to increase production by
extending financial assistance to them and looking for market for their
commodities.

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 UNEMPLOYMENT
Unemployment is a situation where labour is idle at the ongoing market wage rate. According to
keyness, unemployment refers to failure to obtain a job at the ruling wage rate despite ones
willingness to work.
The Employment Objectives
1. The production aspect that is provision of labour which is one of the factors of production
that contributes to the national output.
2. The income aspect .It contributes to the income of an individual when one is paid a salary
or a wage. This increases individual’s spending power which stimulating further production.
3. The recognition aspect. Psychologically one receives satisfaction when he/she is
employed.
The concept of under-_employment
Under - employment exists when a person capacity to work is unutilized. It refers to lack of
productive employment and mismanagement of human resource it exists in the following ways;
1) Disguised unemployment.
This is where the marginal product of labour is zero and one can be removed from work
without affecting total output.
2) Taking a job which is not in line with one’s training.
3) Working full time on socially unnecessary job even if it is paying.
4) Working less labour time than the desired.
5) Working full time on unproductive activities due to lack of co operant factors e.g.

TYPES OF UNEMPLOYMENT
1. Voluntary unemployment: This is a situation where the jobs are available but the
individuals do not want to work at the ongoing market wages rate. This happens when
labour force despise the available work and find the wage rate unacceptable or is just lazy
or hate work
2. Involuntary unemployment: This is a situation where members of the labour force are
idle and willing to work but are unable to find work at the existing situation and on doing
market wage rate. This happens when labour forces despise the available work and find
the wage rate unacceptable or is just lazy or hates work.
3. Seasonal unemployment: This is due to seasonal changes in productive or economic
activity. For example this type of unemployment applies to farmers / agricultures tourism
and construction. It occurs on regular basis when workers are kept idle at regular
intervals or periods. Its caused by
 Dependence on nature
 Limited skills
 Low technological base- i.e. poor technology used. It can be solved by :
 Technological improvement e.g. irrigation
 Diversification of economic activities
 Industrialization

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 4. Structural unemployment: Is caused by structural changes in the conditions of supply and
demand. It occurs mainly when the supply of labour is greater than its demand in a given
area.
It may be due to the following factors
 Change in fashion or tastes plastic replaced clay cups
 Use of capital – intensive technology
 Exhaustion of minerals which makes specialist miners unemployed
 Due to overall social and economic change
Structural unemployment can be solved by
 Flexibility to production which enables industries to change with change in tastes
and fashions
 Diversification of production
 Use of labour- intensive technology especially in LDCS
 To train workers to do may jobs
 Solve rural urban migration
5. Frictional or Normal or transitional or search unemployment: This refers to the amount of
unemployment that corresponds to job vacancies in the same local labour market and
occupation. It occurs because it takes time for labourers to get another job when she / he
leave the former job.

It may arise due to the failure of price mechanism to shift labour from one place to
another due to obstacle of movements or ignorance of workers of act the existence of new
jobs elsewhere.

6. Disguised unemployment: Is a type of unemployment where the work available to a

given labour force is insufficient to keep it fully employed so that some members, of the
work force could be with - drawn without any loss of output. It leads to redundancy any
at work because work is accomplished quickly. It occurs when the marginal product of
labour is zero and work is equally shared by all the workers.

Causes of disguised unemployment

 Over population
 Preference of work sharing by trade unions solutions
 Population control to reduce pressure on land
 Increased industrialization to absorb the redundant labour force
 Widening of the market so as to expand output
 Introduction of better methods of production through provision of more and better
tools

Hidden unemployment: Is a situation where by one is employed in a second choice

employment activity.

Technological unemployment: This is a type of unemployment where labour is replaced by

machines and the output of the firm or industry increases

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Cyclic unemployment / mass: This is sometimes referred to as Keynesian unemployment. This
is a kind of general deficiency in aggregate demand measure of the purchasing power of
community (individual)

Residual unemployment: This is a state when labour is unable to work because he/she is
physically or mentaly incapacitated i.e. It is unemployment of the disabled persons

Provision of special educational training to the disabled persons and other special packages of
the affirmative actions

Open urban unemployment: This is a type of unemployment which is common in urban

centers when the labour force is both voluntarily and involuntarily in employed and
unemployment is clearly visible with labour radiantly idle.

This is a type unemployment is mainly caused by rural urban migration areas (RUM) where by
workers more to urban areas from the rural area in search of employment opportunity which are
not available

Causes of open urban unemployment

 Concentration of economic activities in the urban areas more than in the rural areas
 Population pressure in rural areas
 The wage gap between urban & rural areas opportunities
 Search for employment
 Land shortage and backwardness of rural areas
 Establishment of cortege industries in rural areas
 Establishing social services in rural areas

Transitional unemployment: occurs when one looses interest in his / her job like teaching and
wants to take law because of some factors like dis-satisfaction, Retrenchment etc. Closure of the
industry one had been employed – in.

The unemployment problem

In development economies, unemployment arises from demand side i.e. lack of sufficient market
for goods produced hence the need to produce or limit the number of workers in LDCS
unemployment arises from the supplies side of view i.e. LDCS lack production resource at their
disposal so as to employ more labourers for e.g. they lack capital skilled man power, enough
fertile land etc.

GENERAL CAUSES OF UNEMPLOYMENT IN UGANDA

The nature of un employment in the rural sector is mainly hidden unemployment which is due to
poor soils, over population, lack of land, poor methods of production weather vagaries.

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Generally, un employment in Uganda has been due to the following factors.

1. Rapid population growth: This has led to increased urbanization (rum) leading to
distinguished and structural unemployment. Many go to urban centers and this has caused
agricultural stagnation.
2. Nature of education system: The poor educational curriculum which trains people for
only white color jobs i.e. more job seekers than creates .Formal education has expanded
more than technical education.
3. Immobility of labour due to lack of information in the labour market.
4. Rural urban migration due to social services gap and wage gap between the rural and
urban area.
5. Variations in seasonal and over dependence on few exports crops which lead to
fluctuation in the level of employment with change in seasons, fluctuation in prices.
6. Use of capital intensive technology which has replaced labour power.
7. Political upheavals / instabilities especially in 1970s these discouraged foreign investors
who used to employ many people in 1960
8. Regional imbalance in construction of industries.
9. Long age for retirement such that it’s difficult to get vacant places in government service.
10. Poverty among parents. Very few parents send their children to school and therefore,
their children lack skills due to low education attained.
11. Export of raw materials hence un employment is created in secondary and tertiary sectors
12. Low wage rate /poor remuneration.
13. When the wages being paid are too low, some workers may decide not to seek for
employment.
14. Excessive use of expatriates to some fields causes unemployment to the local population.
15. Exhaustion of natural raw materials. When strategic raw materials get exhausted,
structural un employment may result in the economy.

Other causes of unemployment

 Retrenchment
 Laziness
 Changes in tastes and preferences
 Discrimination in the labor market
 Low production
 Poor working conditions.
 Land tenure system

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 SOLUTIONS TO CURB UNEMPLOYMENT IN UGANDA

1. Establishment of cortage /foot - loose industries. These are small industries which usually
use labour intensive technology.
2. Population policy through family planning, female education, long education period etc.
3. Laying off workers who are over the retirement age
4. Removing structural imbalance between rural and urban areas for example extending
social services and reducing the rural urban wage gap.
5. Development of agricultural sector through provision of incentives to farmers, changing
land tenure systems encouraging the formation of co-operatives .etc
6. Improvement of working conditions can reduce moving of people from one job to job.
7. Restrict the influx of foreign labour into the country.
8. Improving planning, government policies can avoid foreign policies from international;
bodies like IMF, World Bank.
9. Diversification and industrialization to check on seasonal; unemployment.
10. Encouraging rural –rural migration through settlement and resettlement scheme.
11. Re- orientation of the education system to suit the development needs in Uganda .more
technical or and agricultural institutes should be established.
12. Moral rehabilitation to the population should be encouraged to avoid conservative masses
for example illiteracy campaigns, adult education be encouraged.
13. Improving the security situation nationwide and promoting political stability so as to
create investment climate.

THE CONCEPT OF FULL EMPLOYMENT

Full employment is a situation in an economy whereby all those seeking for employment are able
to find jobs for themselves or a situation in an economy in which the number of vacant posts or
jobs is equivalent to the number of those seeking for employment?

Though this phenomenon is almost in achievable for some economies, 3% or less having no
employment can be regarded that such economy has also reached full. Employment level.

PROBLEMS ASSOCIATED WITH FULL EMPLOYMENT.

 Workers become inefficient because there is no fear of losing the job (employment)

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  The position of trade unions becomes stronger especially improving upon working
conditions of workers eg. Long holidays, increasing wages, increase in fninge benefits
decrease on working hours.
 There is high labour immobility
 The level of production falls hence low supply of goods.
 Inflation crops in such an economy.
 Misallocation of resources as there is no urge to change jobs and alongside the effect of
inefficiency.

THEORIES ON CAUSES AND SOLUTION TO UNEMPLOYMENT

This theory was investigated by lord maynaid Keynes who hired between 1884to [Link] is one
of the greatest classical economists of the 20th century.

One of the famous books he wrote was on the general theory of employment; interest of money
1935 which greatly marked the beginning of the new error in the study of economics though his
work was difficult to read and interprete as it caused long controversy in explanations, he
introduced his ideas in reference to the effects and causes of the great world depression in 1920’s
– 1935 which mainly affected western particular

He explained the cyclical unemployment problem to have been caused as a result of a fall in
aggregate demand where by aggregate supply exceeds aggregate demand which caused a fall in
investment followed by a fall in scale of productions, incomes, saving and employment levels.

According to Keynes, when there is lack of aggregate demands employers can not expand
production to employ more people and even they lay off some workers. This type of
unemployment is mainly found in developed countries. Keynes explained that during this type of
unemployment, the level of national income at Equilibrium is lower than that at full employment
of resources i.e. a situation in an economy of the deflationary gap.

The keynessian theory of unemployment states that unemployment arises due to deficiency in
effective aggregate demand for goods and services especially during times of economic recession
or depression.

NB Aggregate demand is the summation of government expenditure (a) and Foreign sector (x-
m) i.e. C+I+G+(X-M). This form of unemployment can even occur at Equilibrium, where
aggregate demand = aggregate supply. This point is called unemployment Equilibrium
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Due to low demand for final products entrepreneurs find themselves with a lot of unsold stock of
goods. They are therefore forced to reduce their levels of output

Due to multiplier effects, the income level falls, investment is discouraged and consequently
labour and capital are rendered unemployed.

The fall in investment initially leads to unemployment and subsequently to further fall in
consumption leading to further declines in incomes and production which worsens the
unemployment.

Features of Keynesian unemployment

 High rate of labour mobility as a result of wide spread unemployment

 Not only labour becomes unemployment but also other factors of production like capital,
land and enterprise.
 Aggregate demand in an economy falls or becomes inadequate to match with aggregate
supply as full employment will not reached thus causing involuntary unemployment
wide spread rate of unemployment is nearly in all industries nation wide

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 ILLUSTRATION OF KEYNESIAN UNEMPLOYMENT

Expected Deflationary gap = Deficiency in demand

Ass AD (C+1+G+X-M)

Add

45º

Y Y1 Income

Key = Y = Equilibrium level of income

Y1 = Full employment level of income

Y Y1 = the level of unemployment caused by the deficiency to demand (deflationary gap)

SOLUTIONS TO KEYNESIAN UNEMPLOYMENT

 Expansionary monetary policy like deficit financing (government borrowing from central
bank) buying of societies from the public which increase the amount of money in
circulation this helps in raising the level of aggregate demand in the economy
 Increasing government expenditure so as to boost the level of aggregate demand in the
economy
 Use of fiscal policy i.e. tax reduction so as to increase the level of disposable income in
economy
 Provision of subsidies to consumes so as to encourage more consumption of goods and
services in the economy
 Expansion of market for goods and services produced to the economy
 Offering soft rates along side long periods of payment
 Encourage private investment through granting investment tax alliances tax holidays low
interest rate on loans obtained for investment purpose, subsides etc tax relief / allowance

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 Stable, economic polices e.g. on price levels, rates of employment etc
 Raise aggregate demand thus use of monetary policies e.g. expansionary
a. Reduce bank rate
b. Buy securities from the public (OMO)
c. Eliminate selective credit control
d. Lower the variable reserve ratio
e. Reduce special deposits etc
 Wage or income policy, i.e. government should come up with an appropriate level of
wages that match with the cost of living
 Trade export policy, involves export promotion where by industries are built for the
production of export and import substitution
 Nationalization policy
 Price policy lowering prices of commodities so that aggregate demand may be boosted up
hence encourage production and consequently increasing employment phtectionism
policy the ant and type of import should be reduced so as to arouse domestic production
meet demand
Keynesian unemployment in Uganda (LDCS)
The relevance of keynessian in Uganda
 In LDCS (Uganda) there is an element of increasing industrialization which is always
characterized by keynessian or cyclical unemployment. Thus the theory may apply in the
industrial sector
At times unemployment in Uganda results due to fall in demand for the products both in
the domestic market and abroad.
 In the long run as the supply of cooperate factor for labour increases, the theory becomes
relevant
 The provision of stable export markets affects employment problem by reducing the rate
of unemployment theory making the theory relevant
 The investment climate affects employment level and therefore promotion of investment
in Uganda will expand employment opportunities
 Use of expansionary monetary policies to increase purchasing powers in Uganda have
tended to increase employment levels
 In Uganda (LDCS) reduction in government expenditure leads to a reduction in
employment i.e. expenditure in social over heads, economic projects, consumer goods

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 and services is quite high in LDCS. This implies that only a high change in government
expenditure will have a big multiplier effect to the economy. It needs to be highly
controlled level
 The marginal propensity to import (MPM) is very high in LDCS this means that a lot of
exchange leaks out of the country / economy so that at deflationary gap is realized and as
such the remedy is keyness theory
 If the value of exports is high, the value of income rises by means of the export multiplier
process hence employment also rise and vice-versa

NB investment is an important determinant of the level of income and employment investment

plays an important role in industnalized nations, therefore the keynessian theory of
unemployment is mainly applicable to industrialized nations/ countries. T he main cause of
keynessian unemployment being deficiency to aggregate demand

However the theory is not totally in relevant in LDCS. It is mainly useful in explaining the effect
of change in export earning and change in government spending

IRRELEVANCE OF KEYNESSIAN UNEMPLOYMENT TO UGANDA

 It is mainly concerned with the demand deficiency yet the unemployment problems in
Uganda are basically from the supply side e.g. in the agricultural raw material
 The theory is applicable under conditions of full employment yet such conditions are not
found to Uganda (LDCS)
 It mainly affects industrialized economies yet LDCS are mostly agro- based countries the
case with Uganda .As a solution to unemployment, Keynes prescribes polices which
increase the levels of aggregate demand e.g. reduction in bank rate, special deposits,
buying securities from public, however such policies are inflationary in Uganda( LDCS)
 The theory is based on the assumptions of a highly monetized industrial economy.
However, Uganda (LDCS) economy is basically subsistence.
 Keynesian theory of unemployment is based on the existence of a big and strong
private sector yet in LDCS (Uganda) the private sector is still small and weak though
growing.
 The product, factor and money markets in Uganda (LDCS) are not as functional as in
MDCS.

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  Firms in Uganda (LDCS), because of structural difficulties tend not to respond quickly
and effectively to changes to demand
 The theory puts emphasis on investment multipliers as the contributor to employment yet
in Uganda (LDCS) it is the Export Multiplier which is strong and creates more
employment as the investment multiplier is weak and does not initiate much of the
employment opportunities.
 Keynes based his theory on a closed economy yet of Uganda is (LDCS) is an open
economy.
 The high marginal propensity to import in LDCS (Uganda) reduces the multiplier effect
of employment at home.

RURAL URBAN MIGRATION THEORY

This is an explanation of structural unemployment where there is dualism between rural and
urban areas. According to this theory the rate of unemployment in LDCS is determine by Rural –
urban migration. The theory emphasizes the supply side rather than demand side as the origin of
unemployment. Rapid economic growth and industrialization will lead to RUM which increases
unemployment rather than checking on it.

CAUSES OF RURAL URBAN MIGRATION

1. The wage-gap between the urban and rural areas. People move to towns in search of well-
paid jobs.
2. Chances of getting employment (especially white collars jobs) are high in towns
3. Social service –gap between the rural and urban areas e.g. Good roads, schools, hospitals
etc are concentrated in urban areas and this attracts people to move to towns etc
4. Localization of industries in towns which increase employment opportunities in towns
than in rural areas
5. Nature of education system which prepares students to work in urban areas especially in
the tertiary sector.
6. Political instabilities in some rural areas. Security organs (e.g. the police) are
concentrated in urban areas
7. Low prices for agricultural product which force people to abandon agriculture.
8. Low demand for commodities in rural areas. Because people in rural areas who become
rich shift to urban areas where demand for commodities is high
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 9. Shortage and unfair distribution of productive land in rural areas

SOLUTION OF RURAL URBAN MIGRATION

According to the rural urban migration theory, unemployment can be reduced by reducing rural
urban migration. This can be achieved through:

1. Improving economic infrastructure like roads and electricity in rural areas

2. Extending social services like schools, hospitals, and television and radio accessibility
and entertainment facilities in rural areas
3. Rural industrialization especially establishing agro-processing industries
4. Modernization of agriculture to make it an attractive occupation e.g. encouraging use of
tractors and improved seeds and animals breeds
5. Subsidization of agricultural inputs and increase of prices of agricultural products
6. Land reforms which would improve the land market, access land to land users and
distribute land fairly to land users
7. Population control through family planning programs
8. Extending credit at low interest rate to farmers
9. Encouraging foreign and local investors to invest in rural areas e.g. by charging them
lower taxes
10. Changing education system to that which would prepare the youth to work in the
agricultural sector.
11. Opening up new areas in rural areas where population is still low to settle people from
land shortage areas
12. Encouraging or even forcing people who have no jobs in towns to go back to land
13. Political stability in the rural areas
14. Decentralization of civil service to enable people to get services near their homes
15. Encouraging non-governmental organizations to work in backward rural areas.
16. Improvements of rural trading centers to enable people get commodities and inputs very
near.
17. Making the minimum wage uniform throughout the country.

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