Question

write and essay/ research paper about unemployment and inflation. How they are related etc...
requirement 2 pages

Answer 1

Answer:

Unemployment and Inflation:

The relationship between inflation and unemployment has traditionally been an inverse correlation. However, this relationship is more complicated than it appears at first glance and has broken down on a number of occasions over the past 45 years. Since inflation and (un)employment are two of the most closely monitored economic indicators, we'll delve into their relationship and how they affect the economy.

Labour supply and demand:

If we use wage inflation, or the rate of change in wages, as a proxy for inflation in the economy, when unemployment is high, the number of people looking for work significantly exceeds the number of jobs available. In other words, the supply of labor is greater than the demand for it.

With so many workers available, there's little need for employers to "bid" for the services of employees by paying them higher wages. In times of high unemployment, wages typically remain stagnant, and wage inflation (or rising wages) is non-existent.

In times of low unemployment, the demand for labor (by employers) exceeds the supply. In such a tight labor market, employers typically need to pay higher wages to attract employees, ultimately leading to rising wage inflation.

Over the years, economists have studied the relationship between unemployment and wage inflation as well as the overall inflation rate.

The phillips curve:

A.W. Phillips was one of the first economists to present compelling evidence of the inverse relationship between unemployment and wage inflation. Phillips studied the relationship between unemployment and the rate of change of wages in the United Kingdom over a period of almost a full century (1861-1957), and he discovered that the latter could be explained by (a) the level of unemployment and (b) the rate of change of unemployment.

Phillips hypothesized that when demand for labor is high and there are few unemployed workers, employers can be expected to bid wages up quite rapidly. However, when demand for labor is low, and unemployment is high, workers are reluctant to accept lower wages than the prevailing rate, and as a result, wage rates fall very slowly.

A second factor that affects wage rate changes is the rate of change in unemployment. If business is booming, employers will bid more vigorously for workers, which means that demand for labor is increasing at a fast pace (i.e., percentage unemployment is decreasing rapidly), than they would if the demand for labor were either not increasing (e.g., percentage unemployment is unchanging) or only increasing at a slow pace.

Since wages and salaries are a major input cost for companies, rising wages should lead to higher prices for products and services in an economy, ultimately pushing the overall inflation rate higher. As a result, Phillips graphed the relationship between general price inflation and unemployment, rather than wage inflation. The graph is known today as the Phillips Curve.