01 Aqifi Duka-macedoine courbe de philips

Journal of Business Paradigms Vol 1 No 1, 2016
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IMPACT OF INFLATION ON UNEMPLOYMENT IN THE
REPUBLIC OF MACEDONIA
Elsana Aqifi
1
State University of Tetovo
Raimonda Duka
University of Tirana
ABSTRACT
Unemployment as a social phenomenon is today present worldwide and often countries
have been forced to take extremely large steps to overcome this social challenge. On the
other hand, inflation or price instability, represents a macroeconomic infliction and it is
considered to be a concern for a country's economy. Although the costs of inflation are
less visible than the costs of unemployment, they also bring significant losses to the
economy of the country resulting in redistribution of wealth between classes or echelons
of different asset distributions, inefficient resource production and decrease in the value
of money. Among the various opinions of various schools associated with
macroeconomic stability, the key indicators of macroeconomic stability are inflation,
unemployment, balance of payments and increased output. Any worsening of these
variables leads to macroeconomic instability. Therefore, the purpose of this paper is to
present the relevance and impact of inflation on unemployment in Macedonia from the
period between 1998-2013 in trying to define an optimal level of the inflation rate, which
will not be detrimental to the economic development of this country. It should be noted
that following the procedure of Puzon (2009), who used "the augmented version of
Stiglitz's model" to capture inflation expectations, the lag of the first order of inflation is
included in the model as a measure of the expected rate of inflation.
Key words: macroeconomic issues, inflation, unemployment
JEL Classification: P24, E23, O11
1
Address correspondence to Elsana Aqifi, Ph.D Candidate, State University of Tetovo, Tetovo,
Republic of Macedonia. E-mail: [email protected]

Impact Of Inflation On Unemployment … Elsana Aqifi, Raimonda Duka
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INTRODUCTION
Inflation and unemployment represent two of the main economic problems, while
any macroeconomic policy objective is to reach a sustainable economic growth
with a low rate of inflation and unemployment. Unemployment as a social
phenomenon is present worldwide today and often countries have been forced to
take extremely large steps to overcome this social phenomenon. On the other
hand inflation, or price instability, represents a macroeconomic disease and is
considered to be a concern for a country's economy. Although the costs of
inflation are less visible than the costs of unemployment, they also bring
significant losses to the economy of the country resulting in redistribution of
wealth between classes or echelons of different asset distribution, inefficient
resource production and decrease in the value of money. Among the various
opinions of various schools associated with macroeconomic stability, the key
indicators of macroeconomic stability are inflation, unemployment, balance of
payments and increased output. Any worsening of these variables leads to
macroeconomic instability. Therefore, the purpose of this paper is to present the
relevance and impact of inflation on unemployment in Macedonia from the period
1998-2013 in trying to define an optimal level of inflation rate, which will not be
detrimental to the economic development of this country. It should be noted that
following the procedure of Puzon (2009), who used "the augmented version of
Stiglitz's model" to capture inflation expectations, the lag of the first order of
inflation is included in the model as a measure of the expected rate of inflation.
LITERATURE REVIEW
(Phillips 1958) graphically concludes a significant inverse relationship between
change in wages and unemployment rates. He submitted that the higher the
difference in wages, the lower the unemployment rate and vice versa. Based on
the conclusion of Phillips, (Samuelson and Solow 1960) find an empirical
relationship between the inflation rate and the unemployment rate in the US.
According to M. Friedman (1977), the relationship between inflation and
unemployment has gone through three steps. The first step was the acceptance
of a stable "trade-off" or an inverse relation between inflation and unemployment
(lasting Phillips curve). The second step has been the introduction of inflation
expectations as a variable that has changed the short-term Phillips curve and the
natural rate of unemployment by setting a long-term vertical Phillips curve. The

Journal of Business Paradigms Vol 1 No 1, 2016
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third step is caused by an empirical phenomenon of a significant positive
relationship between inflation and unemployment.
The 90's saw high inflation coupled with high unemployment and the Phillips
curve during this period was marked by a positive slope – it wasn’t vertical.
The second step, as explained above, has been influenced by two major
developments in economic theory: analysis of imperfect information and its
acquisition cost and the role of human capital in determining the shape of the
labor contracts. As the third step, a subsequent important development is the
application of economic analysis to political behavior. Of relevance is that the
obvious positive correlation between inflation and unemployment has been a
source of great concern to government policymakers during this period.
(Ball-Moffitt 2001), (Koenig 2000), (Brayton-Roberts-Williams 1999), and
(Staiger-Stock- Watson 2001) emphasize the role of the revival of productivity
growth in keeping inflation down, some directly and some work otherwise
through an increase in profit margins making it possible due to a delay in the
growth of real wages after the acceleration of productivity. (Karanassou, et al.
2003) have examined the long-term empirical relationship between inflation and
unemployment, using a panel data study for European countries. They
concluded that there is a long-term trade-off between inflation and
unemployment in the case of European countries. (Beyer and Farmer 2007)
investigated the association between unemployment and inflation using the
database for the US from 1970-1999. They found that there is a direct
relationship between inflation and unemployment in the US in the long run.
Studies made by (Schreiber and Wolters 2007) and (Franz 2005) analyze
whether there dominates a long-term trade-off between inflation and
unemployment in Germany, or if there is a positive relationship between them.
Both studies concluded that there is an inverse relationship between inflation
and unemployment in the long term in the case of Germany. (Berentsen, et al.
2008) have explored the relationship between inflation and unemployment in the
US for the period from 1955 to 2005. They concluded that there is a positive
relationship between inflation and unemployment, and they also found a positive
relationship with regard to the frequency after filtering higher movements.
(Popovic 2009) conducted a survey on inflation and unemployment in the EU: a
comparative analysis of Phillips regularity by analyzing the correlation between
unemployment and inflation in the EU for the period 1998-2007 revealed that the
simple linear correlation coefficient between them is negative.

Impact Of Inflation On Unemployment … Elsana Aqifi, Raimonda Duka
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They concluded that the relationship between unemployment and inflation is
moderate and negative. (Ansari, et al. 2011) have used correlation analysis in a
multiple time series between the inflation rate, the employment rate and the rate
of the gross domestic product. They use the time series data from 1982 to 2006
in Malaysia. They used the econometric techniques Unit Root Test, the Co-
integration Test and the Granger Causality Test. The overall results indicate that
inflation and employment rights relate to the GDP in the short term. (Aminu and
Anono 2012) used OLS, ADF for the unit root, Granger Causality, Johansen
cointegration, and ARCH and GARCH techniques.
The study found a negative relationship between inflation and unemployment
and no causality between unemployment and inflation; although they found that
there exists a long-term relationship between the two phenomena in Nigeria.
(Chu, et al., 2013) analyzes the effects of inflation in the long run between
unemployment and economic growth. Given the limitations of the CIA for R & D,
high inflation, which increases the opportunity cost of holding cash, leads to a
decline in innovation and economic growth, which in turn reduces the labor
market and increased unemployment. The model predicts a positive relationship
between inflation and unemployment, a negative relationship between inflation
and R & D, and a negative relationship between inflation and economic growth.
METHODOLOGY
Description of data and resources
During this analysis 16 observations are used. Inflation, annual percentage
change in real GDP, and unemployment rate are all taken from the database of
the International Monetary Fund. If regression variables are not stationary, then it
can be proven that the asymptotic analysis standard assumptions are not valid.
T tests will not follow a normal distribution (t-student), so they cannot test
common hypotheses. (Dickey and Fuller, 1979), and (Fuller 1976) are the first
researchers to formally test the unitary presence of a decrease in the time
series. The main objective is to test the null hypothesis (H0) that the series
contains a unitary root or alternative hypothesis (H1) that the series is stationary.

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Based on the literature and the objectives of this study, the regression model is
specified in the order as follows:
 =  +  +  + +  + 
Ku,
 = unemployment rate
= inflation rate
= Annual change in real GDP as an indicator of economic growth
It should be noted that following the procedure of (Puzon 2009), who used "the
augmented version of Stiglitz's model" to capture inflation expectations, the
delay of the first order of inflation is included in the model as a measure of the
expected rate of inflation . Moreover, a delay of the first order of unemployment
is also included to determine if they can facilitate a better fit of the model as it
has been presented (Puzon 2009).
Following are the assumptions for signs of the explanatory variables: inflation, as
stated by the Philips curve is negatively correlated with unemployment. That is, if
the demand for labor increases due to an expansionary monetary growth, the
unemployment rate will decrease, causing the ratio wage/prices rise and thus,
create a trade-off between inflation and unemployment. Delay of unemployment
is positively related to unemployment where unemployment will increase the
likelihood of the current unemployment rate, if workers are able to find a job.
Based on Okun's law, one would expect that if the coefficient of Okun's is
negative, it follows that a rapid increase in production is associated with a
decrease in the unemployment rate and slow economic growth or a negative
relationship associated with a high unemployment rate (Knotek, 2007).