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A TRADEOFF
• 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
• 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.