INFLATION AND UNEMPLOYMENT: EVIDENCE FROM UZBEKISTAN

: This study examines the relationship between inflation and unemployment and their effect on economic growth. Theoretically, the inverse relationship between unemployment and inflation is revealed by the Phillips curve decay, but this occurs in a short-term economic process. In long-term economic processes, unemployment and inflation can be controlled through the NAIRU. Since the exact level of NAIRU has not yet been accurately calculated in our country, this article examines its theoretical aspects.

Abstract: This study examines the relationship between inflation and unemployment and their effect on economic growth.Theoretically, the inverse relationship between unemployment and inflation is revealed by the Phillips curve decay, but this occurs in a short-term economic process.In long-term economic processes, unemployment and inflation can be controlled through the NAIRU.Since the exact level of NAIRU has not yet been accurately calculated in our country, this article examines its theoretical aspects.

I N T R O D U C T I O N
In macroeconomics, the relationship between inflation and unemployment has been considerably more extensive both conceptually and experimentally.Historically, achieving a low unemployment rate without encouraging unwarranted rises in inflation and wage growth has been a major issue for policymakers.
Labor migration to large cities within the country complicates the economic situation in these cities.The demand for food and accommodation in cities is increasing and this is causing prices to rise further.That is, unemployment contributes to inflation, and inflation contributes to unemployment.This closed loop widens the economic gap between rural and urban areas.

YA S H I
The part of the population that works abroad and brings money to the country is also accelerating this process.The influx of foreign currency into the country increases aggregate demand and pushes prices up.At first glance, it may seem that the more money the state receives, the better.But for the economy of any country, value is important, not money.Money is not value in itself, it is only a measure of value.
The link between the unemployment rate and the rate of inflation is represented by the Phillips curve.A. W. H. Phillips's 1861-1857 study on wage inflation and unemployment in UK is a seminal work in the field of macroeconomics, despite having forerunners.Phillips discovered a constant inverse relationship: salaries climbed quickly during periods of low unemployment and slowly during periods of high unemployment (Hoover).

Picture 1: Phillips curves
Source: Spur Economics In the diagram above, the SRPCs are short-run Phillips curves that are comparable to the original Phillips curve.The LRPC is here long-run Phillips curve and N is the Natural Rate of Unemployment, and economies tend to stabilize at this rate in the long run.If the Natural Rate of Unemployment is 5 % and economy operates initially in this level, there will not be inflation.Assume that the authorities reduce the unemployment rate below 5 % to 3 % with various economic policies.The economy shifts from point N to point A as a result of the government's ability to short-term cut unemployment to 3%.Consequently, we see a leftward shift on SRPC-1.The unemployment rate in the economy is 3% at A. However, this results in a 2% increase in inflation.
Economists are now increasingly replacing the term "natural rate of unemployment" with " non-accelerating inflation rate of unemployment " (NAIRU).It is clear that unemployment above the natural rate is undesirable because it leads to cyclical unemployment resulting from a recession in business activity.On the other hand, if unemployment falls below the level of full employment, then the economy inevitably faces inflationary processes.The natural rate of unemployment (NAIRU) is calculated as the average value of the actual rate of unemployment in the state for 20 years: for the previous 10 years and for the next 10 years.The unemployment rate in the coming period is forecasted taking into account the expected inflation rate.
The "non-accelerating inflation rate of unemployment," or NAIRU, is the term economists use to describe the lowest unemployment rate that can do this.This idea aids in determining the amount of "spare capacity" in the economy.One cannot directly witness the NAIRU.Nonetheless, there are also observable indicators that provide information about the amount of spare capacity in the economy and may be used to draw conclusions about the NAIRU.
When the total demand for products and services is less than the economy's ability to supply them, spare capacity will exist in the economy.
The difference between the NAIRU and the unemployment rate, commonly referred to as the "unemployment rate gap" or "unemployment gap," is a crucial indication of spare capacity in the economy.Even while we cannot directly see the NAIRU, if wage growth and inflation are slowing, there is likely to be spare capacity in the economy, implying that the unemployment rate is higher than the NAIRU.However, if inflation and wage growth are rising, the economy is probably not operating at full capacity, which leads us to believe that the unemployment rate is lower than the NAIRU.When there is no unemployment rate gap, the NAIRU equals the unemployment rate that would be expected if the economy was running at full capacity (Reserve Bank of Australia).

L I T E R A T U R E R E V I E W
During the last few decades, macroeconomic experts from various industrialized nations have examined the link between unemployment and inflation in great detail.Phillip (1958) discovered an empirical correlation between the unemployment rate and the rate of pay growth.Samuelson and Solow's (1960) conclusion that there is a balance between unemployment and inflation was later disputed by Phelps (1967) and Friedman (1968).Friedman also attested to the short-term trade-off between unemployment and inflation.The primary idea states that inflation increases in tandem with labor cost increases when the jobless rate drops below the natural rate of unemployment.
Policymakers are interested in the Non-Accelerating Inflation Rate of Unemployment (NAIRU) because it approximates the amount of leisure in the labor market.It demonstrates the inverse link between rates of inflation and unemployment.Conversely, the NAIRU cannot be observed and has to be computed by statistical models.The most often used method for this is the Phillips curve technique, which evaluates the relationship between salary or price increases and unemployment (Ruberl et al.).
Both Phelps and Friedman disputed the idea that unemployment and inflation are inversely related.Phelps and Friedman claim that because the Phillips curve evolves over time, the ideal unemployment rate is independent of the amount of inflation.Consequently, the trade-unemployment rate is constrained in the near run.In the end, they introduced the country of NAIRU.Under the Non-Accelerating Inflation Rate of Unemployment (NAIRU), inflation starts to increase.Around the beginning of the 1970s, when the US economy was dealing with severe unemployment and inflation at the same time (stagflation), concerns were raised about the durability of the original Phillips curve.Then, other researches refuted Phillips' theory (Lucas, 1976).
Another study conducted in Iran estimated the time-varying NAIRU using the Kalman filter and compared the results to those obtained via HP filter estimation.The research shows that the real unemployment rate is becoming closer to full employment and that there has been a structural unemployment gap over time, as shown by econometric studies and the rising NAIRU.Stated differently, the real and projected unemployment rates did not differ much (NAIRU).It shown that structural issues are responsible for the high unemployment rate and that monetary policies alone would not be able to reduce it over time (Nasseri Oskouie, Abbasinejad and Mehrara, 2020).

M E T H O D O L O G Y
Since the NAIRU cannot be directly seen, econometric models and historical economic data must be used to estimate it.These approximations are by nature ambiguous.A point estimate of the NAIRU is helpful for evaluating policy settings and economic forecasting, but it should not be seen as fixed or precise; instead, it should be analyzed in conjunction with its (usually) substantial standard errors.It was reported that the number of unemployed people in Uzbekistan is 1 million 300 thousand, and another 2 million 400 thousand people will enter the labor market in 2024.The unemployment rate in the country was reduced to 8.9%.The poverty rate decreased from 17% to 14.1%.

YA S H I
Experts of the Institute of Forecasting and Macroeconomic Research (IFMR) calculated the regional labor market index (LMI) based on the results of 2022.The labor market index is an index that helps in evaluating and monitoring the situation in the labor market and includes 5 indicators that directly reflect the current state of the labor market.According to the evaluation level of the labor market index, the index indicators were divided into four groups: high, medium low and medium low.
According to the results of 2022, the group with high index indicators included the city of Tashkent, Navoi and Tashkent regions.The unemployment rate is lower than the national average (8.9%) -6.5% in Tashkent city, 8% in Navoi region, 8.8% in Tashkent region.
The middle group included Bukhara, Andijan, Fergana, Syrdarya, Khorezm, and Namangan regions.The average monthly salary here is not less than 80% of the national average.
The job offer is average, i.e. instead of one vacancy, on average, 5.6 resumes are available.The unemployment rate does not exceed 9.1%.
Jizzakh, Samarkand, Surkhandarya regions and Karakalpakstan are among the low index indicators.The highest concentration coefficient was observed in these regions, that is, instead of one vacant job, there are 17.4 resumes in Karakalpakstan, 14.1 resumes in Surkhandarya, and 12 resumes in Jizzakh region.
In Kashkadarya region, the labor market index is very low, to be precise, it was 2.2.The main reason for this is that there are 16.8 applicants for every vacancy, that is, the number of vacancies is much less than the number of job seekers, and the average monthly salary is the average in the country.is much lower than indicated ("Https://Ifmr.uz/").
The unemployment rate in Uzbekistan is forecast to 7.08 % and unemployed people will be approximately 2.02 mln in 2024.The same time employed rate expected to be 47.54 % and in numbers it will be nearly 13.6 mln .("Employment -Uzbekistan | Statista Market Forecast") The deadline for achieving the 5 percent inflation target planned for 2023 has been extended.In the main scenario of the Central Bank, it is predicted that this period will fall on the second half of 2025, and in the alternative scenario, it will be delayed until the end of 2026.MB expects the inflation rate to be around 8.5-9.5 percent in 2023 and 8-9 percent in 2024.In 2024, the real GDP growth forecast is expected to be around 5-5.7 percent, in 2025 it is expected to be around 5-6 percent, and in 2026 it is expected to be around 5.5-6.5 percent.
In the framework of the alternative scenario, unlike the main scenario, the inflation rate is expected to be around 9-10 percent in 2024, taking into account that the formation of somewhat unfavorable external conditions will create additional pressure on domestic prices.
In this case, the period of achieving the permanent target will be delayed for a longer period, inflation will be around 7-8 percent in 2025 and it is forecasted to decrease to 5 percent by the end of 2026.In this scenario, the main factor supporting economic activity will be fiscal incentives.In this case, in the medium-term perspective, real GDP growth may be lower by 1.5-2 percentage points compared to the forecasts presented in the base scenario.
In most Caucasus and Central Asian (CCA) nations, inflation has persistently stayed high and exceeded central banks' goals.Because a substantial portion of the consumer basket is made up of imported goods and food, inflation rates are erratic.Although several CCA nations had significant repercussions from the 2022 increase in the price of these items and currency depreciations, inflation in the area is still high even when energy and food costs are taken out of the picture.Persistent supply-chain constraints are one of the other variables that have contributed.
The IMF mission expects economic growth in Uzbekistan to slow down from 5.7 to 5.2 percent in 2024, and inflation to accelerate to 11 percent due to the increase in energy tariffs.It was noted that it is necessary to continue strict monetary and credit policy, to significantly optimize budget expenditures and revenues.Prior to the COVID-19 pandemic, the unemployment rates in several industrialized economies, including the United States, the Euro area, Japan, and the United Kingdom, had fallen to levels that had not been seen in decades.Official estimates of these nations' NAIRUs have decreased in keeping with the slower wage growth that had been observed in these economies, which had also attained lower than anticipated levels of unemployment prior to this development.It is unclear how the COVID-19 global recession would affect NAIRU estimations, as will be covered in more detail below.

C O N C L U T I O N S
In Uzbekistan, studies on unemployment and inflation are conducted on a regular basis.But relatively few scholars have looked into their link.Almost nothing is known about the NAIRU level.
In all scenarios of macroeconomic development, the main goal of the Central Bank is to ensure price and financial stability.Taking into account the fact that the pressure of changes in the external situation that occurred in 2022-2023 on the supply factors will remain longer and the effects of some regulated price adjustments on general inflation, the period of reaching the constant 5 percent inflation target is 2025 it corresponds to the second half.
Also, the extension of the period of reaching the target is related to the fact that the gross supply in the economy is delayed in sufficiently meeting the domestic consumption demand, and on the other hand, if drastic measures are taken to restrain the gross demand, there are serious risks to economic activity and financial stability related to the possibility of giving birth.In the framework of the main scenario of macroeconomic development, the inflation rate in 2024 is forecast to be around 8-9 percent.In order to ensure inflation at this level, monetary and credit conditions will be maintained in a relatively tight phase in 2024.
At the same time, based on the level of adjustment of regulated prices in 2024, the inflation forecast may be updated and changes to monetary conditions may be made accordingly.

Picture 2 :
Non-Accelerating Inflation Rate of UnemploymentSource: Reserve Bank of Australia

Graph 1 :
Unemployment rate and annual change in unemployment rate 674 https://yashil-iqtisodiyot-taraqqiyot.uz YA S H I L I Q T I S O D I Y O T VA TA R A Q Q I Y O T 2024-yil, yanvar.№ 1-son.

Graph 2 :
Inflation rate Graph 3: Unemployment rate Source: Republic of Uzbekistan and the IMF.

Graph 4 :
Inflation rate in Caucasus and Central Asian nations Source: IMF National authorities YA S H I L I Q T I S O D I Y O T VA TA R A Q Q I Y O T 2024-yil, yanvar.№ 1-son.
T A R A Q Q I Y O T П Р О Г Р Е С С P R O G R E S S676 https://yashil-iqtisodiyot-taraqqiyot.uz YA S H I L I Q T I S O D I Y O T VA TA R A Q Q I Y O T 2024-yil, yanvar.№ 1-son.