Unemployment And Inflation

Unemployment and Inflation

Introduction:

Unemployment can be defined as the number of people in the economy who are willing to work but cannot find a job, the rate of unemployment is measured by getting the number of people in the economy that are jobless and are between the age of 16 to 65 years and this is divided by the total number of working force in the economy. inflation on the other hand can be defined as the consistent rise in price for a prolonged period of time in the economy, this rise in price include all the goods and services in the economy and in most cases inflation will lead to a recession in the economy.

The Phillips curve is a theoretical perspective of the relationship that exist between inflation and unemployment, the Phillips curve depict that when inflation rises then the rate of employment is high and if inflation is low in the economy then the rate of employment is low in the economy.

Keynes on the other hand tried to explain the causes of inflation as cost push and demand pull, regarding cost push the inflation is caused by the increase in wage rate in the economy. Demand pull inflation is as a result of increased demand which exceeds the aggregate supply.

Inflation and unemployment in the UK:

According to the Phillips curve employment and inflation are related in that when the rate of inflation increases then the rate of employment will also increase, when inflation decreases then the Phillips curve depict that the level of employment in the economy will also decrease. Below is the Phillips curve:

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Unemployment and Inflation

From the above diagram when inflation is high then the rate of unemployment is low and when the inflation level is low then the rate of unemployment is high.

Data on historical data regarding the UK inflation level is retrieved at http://www.safalra.com/ot her/cumulative-historical-uk-inflation/

, the historical data on uk

inflation from 1990 to 2006 is as follows in the table below and the graph also represents the inflation level over the years.

Year

Inflation

2006

3.20%

2005

2.80%

2004

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Unemployment and Inflation

3.00%

2003

2.90%

2002

1.70%

2001

1.80%

2000

3.00%

1999

1.50%

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Unemployment and Inflation

1998

3.40%

1997

3.10%

1996

2.40%

1995

3.50%

1994

2.40%

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Unemployment and Inflation

1993

1.60%

1992

3.70%

1991

5.90%

1990

9.50%

The diagram below shows the historical inflation level in the UK

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Unemployment and Inflation

From the above graph it is clear that there has been a decline in inflation level from the year 1990 when the inflation level was very high, there has also been fluctuations in the inflation level over the years.

The unemployment level for the year 1990 to 2006 is available at http://www.statistics.gov.uk/st

atbase/TSDdownload2.asp , the below table shows the level of unemployment in thousands

1990

2004

1991

2442

1992

2796

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Unemployment and Inflation

1993

2953

1994

2750

1995

2470

1996

2344

1997

2045

1998

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Unemployment and Inflation

1783

1999

1759

2000

1638

2001

1431

2002

1533

2003

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Unemployment and Inflation

1479

2004

1430

2005

1429

2006

1660

This can be represented in a graph as follows:

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Unemployment and Inflation

We can therefore construct a Phillips curve using the above information to find out whether an increase in inflation level will lead to an increase in employment; this is done by representing the graph as follows:

The above diagram shows the levels of employment and inflation, however it does not represent the Phillips curve for the recent years, and this can be explained by the theory of natural unemployment by Milton Friedman. Milton Friedman agued that increased inflation will lead to increased unemployment levels.

According to Milton Friedman there exist a level of unemployment which he referred to as natural unemployment, natural unemployment exist in an economy and he stated that by increasing levels of inflation will not definitely lead to high employment levels because increased inflation may also lead to higher unemployment levels and this is what he referred to as natural unemployment.

Conclusion:

According to the above discussion on inflation and unemployment, Phillips curve depict that an increase in inflation will lead to a decrease in the unemployment level in the economy. In the centrally Milton Friedman in his theory on natural unemployment stated that an increase in the inflation level will lead to an increase in unemployment level, this is because the economy has to have that portion of unemployment which is referred to as natural unemployment.

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Unemployment and Inflation

References:

National statistics (2007) unemployment levels in the UK, retrieved on 18th November, available

at http://www.statisti cs.gov.uk/statbase/TSDdownload2.asp

Safalra (2007) inflation levels in the UK, retrieved on 18th November, available at http://www.sa falra.com/other/cumulative-historical-uk-inflation/

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Press, New York

Unemployment and Inflation

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