Open AccessThe Role of Zakat in Overcoming Inflation and Unemployment: Revisiting the Trade-Off Theory
Author(s) -
Mohammad Syafii Antonio,
Mohammad Mahbubi Ali,
Jebel Firdaus
Publication year - 2021
Publication title -
islam and civilisational renewal
Language(s) - English
Resource type - Journals
eISSN - 2041-8728
pISSN - 2041-871X
DOI - 10.52282/icr.v12i1.822
Subject(s) - unemployment , aggregate demand , economics , inflation (cosmology) , aggregate supply , aggregate (composite) , aggregate behavior , distribution (mathematics) , aggregate expenditure , supply and demand , point (geometry) , full employment , aggregate data , production (economics) , macroeconomics , monetary economics , microeconomics , labour economics , monetary policy , medicine , mathematical analysis , physics , materials science , mathematics , geometry , composite material , pathology , theoretical physics
The present study aims to examine the role of zakat in addressing unemployment and inflation, while also revisiting A.W. Phillips’ trade-off theory. The study adopts a qualitative methodology, using library research to critically analyse how zakat could address unemployment and inflation. The study argues that the optimal application of zakat could overcome the issue of unemployment while maintaining price stability. This is true since zakat can be distributed in two forms: consumptive and productive. Therefore, an increase in aggregate demand will always be followed by a rise in aggregate supply; the distribution of zakat in the consumptive form will increase aggregate demand, while the distribution of zakat for a productive purpose will increase aggregate supply. An increase in aggregate demand would in turn increase production, thus absorbing more labour as a result. This is where zakat addresses unemployment. On the other hand, a rise in aggregate demand will initially inflate the aggregate price. However, since the increase in aggregate demand is simultaneously followed by an increase in aggregate supply due to the distribution of zakat in its productive form, the price remains stable. Aggregate demand and aggregate supply cross at an equilibrium point. More importantly, the price is stable while the quantity of production is at its highest level. The findings of the study serve as a reference point for regulators formulating fiscal policy embedded in the zakat system.