INFLATION AND UNEMPLOYMENT:

A TRADEOFF

•AHMAD ALI KHWAJA

•ADNAN QADIR
•USMAN KHALID
•MALIK HUZAIFA MASOOD
DEFINING
INFLATION & UNEMPLOYMENT

Inflation can be caused by:

• Increase in demand.
• Decrease in Supply.
• Increase in prices due to increase in taxes or other factors.
PHILLIPS CURVE

• William Phillips was a New Zealand economist who spent most of his academic career as a
professor of economics at the London School of Economics (LSE).
• His best-known contribution to economics is the Phillips curve, which he first described in
1958.
PHILLIPS CURVE

• The Phillips curve states that inflation and

unemployment have an inverse relationship.
Higher inflation is associated with lower
unemployment and vice versa.
PHILLIPS CURVE
PHILLIPS CURVE
PHILLIPS CURVE
WHAT IF?
SHIFT OF PHILLIPS CURVE
SHIFT OF PHILLIPS CURVE
LONG RUN PHILLIPS CURVE

• The long-run Phillips curve is a vertical line

at the natural rate of unemployment, so
inflation and unemployment are unrelated
in the long run.
PHILLIPS CURVE
WHAT DETERMINES NATURAL RATE

• Change of Taste in Goods and Services

• Technology
• Mismatch in Skills Required
• Limited Time and Money in Training
• Limited Access to Educational Programs
• Legal Requirements
WHAT DETERMINES NATURAL RATE

• Avoiding Geographical Mobility

• Jobs Expectation Discriminations
• Discriminations in Hiring
• Skills Mismatch with Wages
• Influence of Unemployment Welfare Benefits
• Involvement of Women
THE CRITICS ON NATURAL RATE HYPOTHESIS

• Wage Rise & Fall

• Inflation can be Good
• Money Illusion
COMPONENTS OF THE NATURAL RATE OF
UNEMPLOYMENT
There are following three components of the natural rate of the unemployment
i. Frictional Unemployment
ii. Structural Unemployment
iii. Surplus Unemployment
DESCRIPTION

• Frictional unemployment occurs when workers are in between jobs, for example, it will take time for
graduates to find a suitable job.
• Structural unemployment occurs due to occupational and geographical immobility. For example, some
workers may not have the necessary skills to apply for a job, therefore they cannot supply their labor
even though jobs are available.
• Surplus unemployment occurs whenever the government intervenes with minimum wage laws or
wage/price controls. So employers let some workers go in order to pay mandated wage while keeping
payrolls in budget.
FORMULA TO ESTIMATE THE NATURAL RATE OF
UNEMPLOYMENT

𝐹𝑈 + 𝑆𝑈
𝑁𝑎𝑡𝑢𝑟𝑎𝑙 𝑅𝑎𝑡𝑒 =
𝐿𝐹
Here:
FU = Frictional Unemployment
SU = Structural Unemployment
LF = Labor Force
MINIMUM RATE OF UNEMPLOYMENT

• To achieve the minimum rate of unemployment, the economy must be severely overheated.
• The United States achieved the minimum rate of unemployment of 2.5% in May and June of 1953
because economy was overheated due to Korean War.
THESE PROBLEMS AND ECONOMIC GROWTH

• Okun’s Law:
• When unemployment goes up. GDP goes down.
• Unemployment up from 2 to 4, then GDP goes down by 4% (because of the times 2)
• only applies when the unemployment rate is between 3% and 7.5%.
• If Pakistan has to produce 10 Million jobs. Pakistan would have to grow at the rate of 7.4 per year.