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Unemployment and Inflation are an Explosive Mix

January 17, 2018
Aida Ghajar
6 min read
The economist Farhad Sabetan says that Iran’s economic resources are misallocated
The economist Farhad Sabetan says that Iran’s economic resources are misallocated

The bedlam that is the Iranian economy was once again highlighted during the recent popular protests in more than 100 cities across the country. While demonstrators chanted slogans protesting against miserable economic conditions, authorities dismissed their complaints and claimed that “foreign” forces were behind the protests.

But economic grievances could not be easily dismissed. A representative for Izeh, a city in the southwestern province of Khuzestan, was one of the first to point the finger at the economy and said that many protesters in Izeh were caught in the unemployment trap.

IranWire’s research confirms this claim and show that, in many towns and cities where protests took place, unemployment is a serious social and economic problem.

Speaking to IranWire, Farhad Sabetan, who teaches Economics at California State University, said that the rate of unemployment in developed countries usually hovers around four or five percent; no economy can reduce unemployment to zero, he says. In any economy a percentage of people are “between jobs,” meaning that they are considered to be jobseekers from the time that they become unemployed until they find another job. But, he says, “if this number reaches 5 to 8 percent, it means that in addition to those who are seeking jobs there is a percentage of people who cannot find jobs, and that unemployment has increased.”

Statistics issued by Islamic Republic officials indicate that in various cities and provinces in Iran, the unemployment rate is usually over 10 percent, and in some places it is even higher than 20 percent. According to Sabetan, when the world was in the grip of the Great Depression in the 1930s, unemployment was at 25 percent. “When we say 25 percent unemployment it means that one person in every four is without a job,” he says. “Now consider that in some cities in Iran the rate of unemployment has even reached 40 percent. This means that the economy is totally paralyzed.”


Who Decides What to Produce?

To explain the rate of unemployment and the economic situation in Iran, Sabetan says the most important question is production. “The first question about an economy is what we produce and who decides what is produced,” he says. “In a free-market economy, it is said that people must express their consumption priorities and needs so that the market can satisfy them. When in a country where it is not the people who express their needs and the needs are decided by the government or by the rentiers, we have a problem.”

According to Sabetan, in a 2017 report by the International Labor Organization, the rate of youth unemployment in Iran is estimated to be around 27 percent; when this number is broken down by gender, the rate of unemployment for women reaches 40 percent. “This means that 40 percent of women, especially those with higher than high school education and who are eager to enter the job market, are unable to find a job. And when a society cannot offer jobs for making a livelihood it cannot satisfy its demands and great social ills follow.”

This includes depression and a propensity toward violence, Sabetan says. “If we look at the roots of violence, it all starts with a failure to satisfy basic needs. These needs starts with food and water and housing and extend to security and freedom of expression. When the energy of these frustrated needs is internalized it causes depression and addiction and people in the society self-destruct. If it is externalized it is symbolized by anger, strikes and violence.”

Inflation and job creation are important factors. “An acceptable inflation rate that fits with economic growth is something like 2.5 percent but,” says Sabetan, “not when it reaches 9 to 10 percent, meaning that each time you want to buy goods or services the prices have increased by the same amount. When prices go up this way, you cannot afford the goods that you need even if you have a job and an income. In such a society, failure to satisfy needs is caused, on one hand, by very high unemployment rates and, on the other hand, by inflation. A combination of unemployment and inflation is an explosive mix.”

According to Sabetan, although bringing down inflation to single digits is important, it is in no way enough in any economy because the annual purchasing power falls by the same rate. After a few years of this scenario, the purchasing power is devastated, especially when incomes are fixed but inflation goes up. “At this very moment there are many households that cannot even afford housing, clothes and food,” he says. “Even if they have an income, each year inflation eats into their purchasing power.”

Class Inequality Makes It Worse

He also points to another factor that shapes the current economic situation in Iran: Class inequality, which has been growing in recent years. “When class inequality rises, polarization between haves and have-nots increases, doubling the discontent and creating another obstacle for people in satisfying their needs.”

Sabetan argues that to really understand inflation and what happens in the economy, we must also understand economic indicators that relate to the outside world. Late last year, he says, the value of the rial, the Iranian currency, “fell between 10 to 12 percent, meaning that the price of a dollar by which we sell oil and exports had a 12 percent fall. What’s happening to the Iranian rial is its exchange rate with respect to other currencies keeps going up, therefore its value keeps going down. In technical terms, they say, the rial is depreciating.” 

He explains how this works in terms of Iran’s current economic situation: “There is a relation between the value of currency and domestic prices. At the macro level the more expensive the goods become, especially goods for export, [the less] importing countries buy them and go to cheaper countries. Then the demand for those goods falls. And when the demand falls the buyer has no need for rials. Then demand for the rial and its value falls as well. The value of any currency is inversely related to its exchange rate. As a result, goods for export become more expensive and do not sell. And when there is no sale, production disappears as well. When the production disappears, job creation stops. Again, we come to unemployment. There is a connection between the fall in the value of the rial and unemployment in the exports sector and the Iranian economy, which is a huge export-oriented economy.”


Changing Priorities

According to Sabetan, when the price of oil goes up or the Central Bank prints more money and the liquidity in the economy increases, inflation goes up. More inflation means less purchasing power. “Now the two important problems of unemployment and inflation have reached a point of crisis and are tearing apart the social fabric,” he says. “By looking at the history of revolutions in the world, it becomes clear that an increase in unemployment and inflation leads to social unrest.”

Nevertheless, Sabetan believes that economic problems in Iran can be solved. “The duty of the government and state as a whole is protecting the interests of Iranian citizens,” he says. “The problem will be solved if the state directs economic resources toward satisfying the needs that the people say they have and not the needs as defined by state institutions. Technically speaking, there is no obstacle in the way of changing the priority. We economists and sociologists can help technically, but solving the problems needs the collective will of the government and the state. At this moment, the resources are directed toward institutions such as religious seminaries. These resources must be allocated to satisfy people’s needs. Lack of conformity between people’s needs and the government’s priority not only does not make the situation better, it could even make the crisis worse.”



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