Inflation and unemployment are two key elements when evaluating a whole economy and it is also easy to get those figures from National Bureau of Statistics when you want to evaluate it. However, the relationship between them is a controversial topic, which has been debated by economists for decades. From some famous economists such as Paul Samuelson, Milton Freidman etc to some infamous economists, this topic received a lot of attention. However, it is this debate that makes the thinking about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing. But before started, it is worthy getting a better understanding of the terms, inflation and unemployment. Inflation refers to an increase in overall level of prices within an economy. In simple words, it means you have to pay more money to get the same amount of goods or services as you acquired before. By contrast, the term unemployment is easier to understand. Generally, it refers to those people who are available for work but do not find a work. And unemployment rate, which is the percentage of the labour force that is unemployed, is usually used to measure unemployment (Mankiw 1992). The debate of the relationship between inflation and unemployment is mainly based on the famous “Phillips Curve”. This curve was first discovered by a New Zealand born economist called Allan William Phillips. In 1958, A. W. Phillips published an article “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861-1957”, in which he showed a negative correlation between inflation and unemployment (Phillips 1958). As shown in figure 1, when unemployment rate is low, the inflation rate tends to be high, and when unemployment is high, the inflation rate tends to be low, even to be negative. Figure 1 Phillips Curve Two years later, economists Paul Samuelson and Robert Solow, who are the most infusive representatives of Keynesian School, also published an article, showing the same negative correlation between inflation and unemployment, based on the United States’ economic data (Samuelson and Solow 1960).
According to Trading Economics, the unemployment rate has grown from 6.6 percent in January 2015 to 7.2 percent in January 2016. In Dinner Party Economic it explains the relationship between inflation and cyclical unemployment and how both topics never occur at the same time, “We don’t see inflation and cyclical unemployment occurring at the same time, which is why economists often talk about the unemployment and inflation as a trade-off”,
The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward.
Thus creating the Phillips Curve to show this relationship. In the late 1960s, Friedman, along with Edmund Phelps, opposed the original view on the Phillips Curve and provided theirs. Friedman argued for the concept of Stagflation, the argument that the higher the inflation rate, the unemployment rate would go back up as well. Friedman said that not only would we need a higher inlfation rate to keep unemployment down, but also a continuously accelerating inflation rate. In 1970s, this was proven with the stagflation the economy faced. Friedman and Phelps were able to use this and sway the views of most economists. However, there have been arguments since the 1970s that argue against Friedman-Phelps’ theory.
The economy starts at point U, and the government's decision, it hopes to reduce the level of unemployment, because it is too high. Therefore, the 5% decided to stimulate demand. Will soon start to lead to inflation in the demand for goods and services is growing, so in the increase of employment will soon be destroyed, people realize that, there is no real increase in demand. It is along the Phillips curve from u to V, companies began layoffs, the unemployment rate once again return to the W. next in the enterprise and consumers are ready, and expected inflation. If the government insist on trying again the economy will do the same thing (W to X to Y), but this time at a higher level of inflation. Any attempt to reduce inflation below the level at U will simply be inflationary. The rate U is the natural rate of unemployment.
For what has been a very, very long time, our elected representatives have sought to achieve “full employment” as a national goal….but full employment has been suspect as a possible cause of inflation, and is therefore weakened by decisions of the Federal Reserve, in an attempt to retard inflation. In terms of causes, unemployment has changed; the character, degree of severity, possible solutions of unemployment over the last ten years or so have been reduced, and has morphed in terms of just who is experiencing the unemployment and the suggestions for answering the problem. It has been the traditional fundamental trades, like manufacturing, viewed as part of the shift in the economy towards the new information age model, as workers transition from a manufacturing economy to a service economy, all the while over-coming the obstacles set forth by our own government.
The high and persistent levels of unemployment in the United States have become one of the most debated topics among economists, policy makers and the unemployed for more than a decade; especially its impact and best approach to resolving the increasing unemployment rates. It is important to note that as much of a global phenomenon unemployment it is, unemployment occurs in numerous forms, economists have broken down unemployment into three main types: Frictional, structural and cyclical. The in-cooperation of these forms is significant to this paper for better understanding of current trends and identifying characteristics of structural unemployment.
PHILLIPS, A. W. (1958). The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. Economica, New Series, Vol. 25, No. 100, pp. 283-299, November. Available at http://www.jstor.org/stable/2550759.
Macroeconomic factors like inflation and unemployment are considered as a top-down approach that portrays the bigger picture of the functioning of the whole economy. In every region, it is the macroeconomic factors that determine the manner of operation of the economy with stability in these factors indicating economic stability and an unstable condition of the factors equally leading to poor performance of the overall economy. The paper examines how inflation and unemployment affected businesses in the UK in 2014.
I disagree with this statement. I don’t think that inflation is always bad for the economy, because inflation can in time lead to deflation. An example of the effect of inflation would be consumers spending less money when prices are constantly rising, because they would rather buy the items now and spend less money than purchasing them in the future. Even though deflation is normally considered a negative thing, it’s not always bad either. Good inflation is something that happens when companies can manufacture good at lower cost without losing revenue or raising unemployment. One way that the government can increase deflation is by putting more money into supply by purchasing securities. In the end, both inflation and deflation are both parts
Unemployment is everywhere in the U.S today. Whether it’s a small or big job people still are unable to find jobs. Then again some people file for unemployment if they are going through a tragedy and you just can’t seem to be able to work anymore. All of this, meaning unemployment has to do with the business cycle. There are four stages of the business cycle and they are recovery, peak, recession, trough. These are all stages whether the economy is at its highest point, lowest point, or just staying the same. The peak is the highest stage that the economy can possibly reach. Recession is where the economy becomes to struggle and start dropping off. The trough is the lowest point the economy can reach. Recovery is where we begin to build the economy back up after being in a trough. I believe that today our U.S economy is at its peak but beginning to recess.
The classical economists before the great depression claimed that if wages fall unemployment also falls, because workers will accept lower wages as a way to get a job, so the nation decreases the wages in order for workers to work with low wages and increase employment, however this did not happen, unemployment was increasing and Keynes was the savior. According to Keynes, the reason of unemployment is not wage rate but aggregate demand, and
Persistently high unemployment creates huge costs for individuals and for the economy as a whole. Many of these costs, especially the long-term social costs, are difficult to assess by measuring.
Last week, it decreased to the lowest it has been since the 1970s, but now the unemployment rate is climbing back up to what it used to be. It is always a goal for the economy to have zero unemployment, yet reaching that goal seems to be unobtainable. There is always going to be someone in between jobs or looking for a new job. Even a successful, growing economy has unemployment; it is a healthy, natural cycle. The only type of unemployment that is bad is cyclical unemployment; it means the economy cannot provide for its workers. Some economies just go through creative destruction, which is a part of structural unemployment. It is not a bad thing at all. New advances are created nearly every week, therefore we seem to throw away the old and get with the new things. We have to work to create more jobs and get to our desired unemployment
Unemployment is a problem across all states of Australia and in many other countries as well. It impacts consumers, businesses and governments. Unemployment is when people are trying to find work but so far have been unsuccessful. The government calculates unemployment rate by the number of unemployed divided by the total labour force times by 100.
The article written by Nelson D. Schwartz titled Hiring Rises, but Number of Jobless stays High was very informative and interesting. After reading this article multiple times, it is clear that the unemployment rate in the United States in a major concern. Unemployment results to other issues including, overall spending, competitive work field, psychological issues, and forced overtime. In this article many issues and solutions are discussed, which help determine the future and conclusion of unemployment. By analyzing the graphs and statistics found in this article, I believe that unemployment will always exist, but it can and will improve.