Economic theory has established a close correlation between employment (and its opposite, unemployment) and inflation. It tells us that when an economy is experiencing an upsurge, there is increasing pressure on the supply of factors of production—especially labor—and this leads to increases in the prices of such items as their users compete for diminishing supplies. Thus, the relationship between unemployment and inflation is an inverse one: as unemployment declines, inflation rises. Stated differently, as unemployment rises—and workers and other owners of factors of production are willing to accept reduced wages—inflation recedes.
The latest Philippine Statistics Authority (PSA) data on unemployment/employment and inflation are sending conflicting messages about the state of the economy as it completes the end of 2017’s first quarter. The unemployment/employment data are contained in the January 2017 Labor Force Survey (LFS). The latest inflation figures have come from NEDA (National Economic and Development Authority) and cover the movement of selected consumer prices between January 2017 and last month.
First, the unemployment rate. According to the PSA data, this rose to 6.6 percent of the labor force in January 2017 from 5.7 percent in January 2016. The reciprocal of the unemployment rate—the employment rate—declined from 94.3 percent of the labor force in January 2016 to 93.4 percent a year later. There were 40.6 million Filipino workers with jobs in January 2016; one year later this number had gone down to 39.3 million.
Neda said that fully two-thirds of the total employment loss was accounted for by the agricultural sector, a fact that the national planning agency attributed mainly to the natural disasters that had visited the country between January 2016 and January 2017. Neda pointed also to the gradual disappearance of jobs associated with the 2016 general election. With regard to the role played by educational attainment in the composition of the workers who lost jobs, Neda had this to say: “The increase in unemployed Filipinos came from the ranks of those with elementary education only (128,000 jobs lost), followed by those with high school education only (88,000 jobs lost).”
And what was needed from the government by way of corrective intervention? “(T)he government must focus intervention to diversify the sources of income of (agriculture sector workers), increase labor force participation of women and address youth unemployment,” Neda declared.
Now for inflation.
Neda reported that between January and February this year the inflation rate breached the 3 percent mark for the first time in two years. The February inflation rate was 3.3 percent; the January figure was 2.7 percent. The last time the inflation rate was above 3 percent was in November 2014, when it stood at 3.7 percent.
The target inflation range of the Bangko Sentral ng Pilipinas for 2017 is 2 percent to 4 percent. For February the target was 2.7 percent to 3.9 percent.
BSP attributed the rise of the inflation rate between January and February to the increases in food and electricity prices and the impact on domestic prices of the ongoing depreciation of the peso.
These attributions are valid. Yet, there is no gainsaying the conflict in the signals that the movements in the unemployment rate and the inflation rate are sending. Inflation is not supposed to be rising when the demand for labor and other factors of production are declining.
Is the Philippine economy headed in an upward direction, as indicated by the rising inflation rate, or is it headed downward, as indicated by the falling employment rate? Obviously, it cannot go in both directions. The next few months will tell what the correct direction is.
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