Unemployment and Inflation

Unemployment
and Inflation
Unemployment and Inflation
Nature of
Unemployment
NATURE OF UNEMPLOYMENT
■ The meaning of ‘unemployment’

✜ defining the unemployment rate
✜ claimant unemployment
UK claimant unemployment flows (millions)

✦ do
claimant statistics give a true picture of
unemployment?

✦ doclaimant statistics give a true picture of
unemployment?
✜ standardised unemployment (ILO/OECD)
■ The duration of unemployment

✜ inflows to and outflows from the stock of
unemployment
Flows into and out of unemployment
From jobs From outside the labour force
•People made redundant •School/college leavers
•People sacked •People returning to the
•People temporarily laid off labour force (e.g. after
•People resigning raising children)
INFLOWS
(per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs From outside the labour force
•People made redundant •School/college leavers
•People sacked •People returning to the
•People temporarily laid off labour force (e.g. after
•People resigning raising children)
INFLOWS
(per period of time)
UNEMPLOYMENT
To jobs OUTFLOWS To outside the

(per period of time) labour force
•People taking new jobs •People who have become disheartened
•People returning to old and give up looking for a job
jobs who had been •People who have reached retirement age
temporarily laid off •People who temporarily withdraw from
labour force (e.g. to raise a family)
•People who emigrate
•People who die

unemployment
✦ effects on the duration of unemployment

unemployment
✦ effects on the duration of unemployment
✜ the phase of the business cycle

Unemployment rates in selected industrial countries
UK
14
12
Unemployment (% of workforce)
10
2
UK
14
12
10
2
UK
14 France
12
10
2
UK
14 France
12
10
2
UK Germany
14 France
12
10
2
UK Germany
14 France
12
10
2
UK Germany
14 France USA
12
10
2
UK Germany
14 France USA
12
10
2
UK Germany Japan
14 France USA
12
10
2
UK Germany Japan
14 France USA
12
10
2
UK Germany Japan
14 France USA OECD
12
10
2
UK Germany Japan
14 France USA OECD
12
10
2
■ The composition of unemployment

✜ by geographical region
✜ by sex
✜ by age
✜ by ethnic groups
■ The costs of unemployment
✜ to the unemployed themselves
✜ to family and friends
✜ to society at large
Causes of
Unemployment
CAUSES OF UNEMPLOYMENT
■ Unemployment and the labour market

✜ aggregate demand and supply of labour
Disequilibrium unemployment
ASL
Average (real) wage rate
ADL
No. of workers

✜ equilibrium in the model
ASL
We
ADL
O
Qe
No. of workers

✜ disequilibrium unemployment
ASL
B A
W2
We
ADL
O Q2 Q1
No. of workers

✜ disequilibrium unemployment
✜ equilibrium unemployment
Equilibrium unemployment
ASL
e
We
ADL
O
Qe
No. of workers
Equilibrium unemployment
ASL N
e d
We
ADL
O
Qe Q2
No. of workers
Equilibrium and disequilibrium unemployment
ASL
e
We
ADL
O
Qe
No. of workers
ASL
Disequilibrium
unemployment
b a
W2
e
We
ADL
No. of workers
ASL
N
Disequilibrium
unemployment
b a c
W2
e
We Equilibrium
unemployment
ADL
No. of workers
■ Disequilibrium unemployment
✜ real-wage (classical) unemployment
Real-wage unemployment
ASL
b b’ a
W1
We
ADL 2
ADL
O Q2 Qe Q1
No. of workers
✜ demand-deficient (cyclical) unemployment

Demand-deficient unemployment
ASL
W1
W2
ADL 1
ADL 2
O Q2 Q1
No. of workers
✜ demand-deficient (cyclical) unemployment
✜ unemployment arising from a growth in

the labour supply
■ Equilibrium unemployment
✜ frictional (search) unemployment
Average duration of unemployment
Wage rate offered (Wo)

Wage rate
Wage rate acceptable

to worker (Wa)
O tl
Period of search
✜ structural unemployment
✦ changing pattern of demand
✦ regional unemployment
✦ technological unemployment
✦ technological unemployment
✜ seasonal unemployment
Aggregate Demand,
Aggregate Supply and
the Price Level
AD, AS and the PRICE LEVEL
■ The aggregate demand curve

Aggregate demand and aggregate supply
Why the AD curve slopes downwards
✦ foreign trade effect
✦ real balance effect
✦ interest rate effect
Price level
The shape of the AD curve
Shifts in the AD curve
AD
National output

■ The aggregate supply curve
AS
Price level
■ short-run and long-run AS

curves
■ the shape of the AS curve
■ shift in the AS curve
O
National output

■ Equilibrium
AS
Price level
Pe
b a
P2
AD
National output

■ Equilibrium
✜ shifts in the AD curve

■ Equilibrium
✜ shifts in the AD curve
✜ shifts in the AS curve
Inflation
INFLATION
■ Defining inflation
■ International experience of inflation

Inflation rates for selected countries
(average % per annum)
Inflation rates in selected industrial countries
26
UK
24
22
nflation (% increase in retail prices)
20
18
16
14
12
10
8
6
4
2
26
UK
24
22
20
18
16
14
12
10
8
6
4
2
26
UK
24 EU 15
22
flation (% increase in retail prices)
20
18
16
14
12
10
8
6
4
2
26
UK
24 EU 15
22
20
18
16
14
12
10
8
6
4
2
26
UK USA
24 EU 15
22
20
18
16
14
12
10
8
6
4
2
26
UK USA
24 EU 15
22
20
18
16
14
12
10
8
6
4
2
26
UK USA
24 EU 15 Japan
22
20
18
16
14
12
10
8
6
4
2
26
UK USA
24 EU 15 Japan
22
20
18
16
14
12
10
8
6
4
2
26
UK USA
OECD
24 EU 15 Japan
22
20
18
16
14
12
10
8
6
4
2
26
UK USA
OECD
24 EU 15 Japan
22
20
18
16
14
12
10
8
6
4
2
INFLATION
■ The costs of inflation

✜ redistribution
✜ uncertainty
✜ balance of payments
✜ resources used to cope with inflation

INFLATION
■ Types of inflation
✜ demand pull
Demand-pull inflation
AS
Price level
P1
AD1
O Q1
National output
AS
Price level
P1
AD2
AD1
O Q1
National output
AS
Price level
P2
P1
AD2
AD1
O Q1 Q2
National output
INFLATION
✜ demand pull
✜ cost push
Cost-push inflation
AS1
Price level
P1
AD
O Q1
National output
Cost-push inflation
AS2
AS1
Price level
P1
AD
O Q1
National output
Cost-push inflation
AS2
AS1
Price level
P2
P1
AD
O Q2 Q1
National output
INFLATION
✜ demand pull
✜ cost push
✜ interaction of demand-pull and cost-push

inflation
The interaction of demand-pull and cost-push inflation
AS1
Price level
P1
AD1
National output
AS2
AS1
Price level
P2
P1
AD2
AD1
National output
AS3 AS
2
AS1
P3
Price level
P2
P1 AD3
AD2
AD1
National output
INFLATION
✜ demand pull
✜ cost push

inflation
✜ structural (demand shift)
INFLATION
✜ demand pull
✜ cost push

inflation
✜ expectations and inflation

INFLATION
✜ demand pull
✜ cost push

inflation

■ Policies to tackle inflation
INFLATION
✜ demand pull
✜ cost push

inflation

✜ demand-side policies
INFLATION
✜ demand pull
✜ cost push

inflation

✜ demand-side policies
✜ supply-side policies
Relationship between
Unemployment and
Inflation
RELATIONSHIP BETWEEN
INFLATION AND UNEMPLOYMENT
■ Aggregate demand and inflation and

unemployment
✜ effects of increases in aggregate demand (relative
to potential output)
✜ how the objectives vary with the course of the
business cycle
■ The Phillips curve

✜ the original curve
✜ the apparent policy implications
The original Phillips curve
9
7
Wage inflation (%)
1 Unemployment
■ The 'Phillips curve' in recent times

✜ the breakdown of the Phillips curve and the
problem of stagflation in the 1970s
Inflation (%) The breakdown of the Phillips curve?
26
24
22
20
18
16
14
12
10
65
6662
8 61 64 67
63
6 60
4
Unemployment (%)
26
24
22
20
18
16
14
12
10
65 Original Phillips curve
6662
8 61 64 67
63
6 60
4
Unemployment (%)
26
24
22
20
18 74
16
14
7 7
12 3 1
7
7 2
10 0
69
65
68
6662
8 61 64 67
63
6 60
4
Unemployment (%)
26
75
24
22
20
76
18 74 77
16 79
14
7 7
12 3 1 78
7
7 2
10 0
69
65
68
6662
8 61 64 67
63
6 60
4
Unemployment (%)

✜ experience of the 1980s

26
75
24
22
20 80
76
18 74 77
16 79
81
14
7 7
12 3 1 78 82
7
7 2
10 85
0
69 84
65 83
68
6662
8 61 64 67
63
6 60
4
Unemployment (%)

✜ experience of recent years

26
75
24
22
20 80
76
18 74 77
16 79
81
14
7 90
7
12 3 1 78 89 82
7
7 2
10 91 85
0
69 84
65 88 83
68 87
6662 95 86
8 92
61 64 67 94
63 93
6 60
4
Unemployment (%)

✜ a horizontal Phillips curve?

26
75
24
22
20 80
76
18 74 77
16 79
81
14
7 90
7
12 3 1 78 89 82
7
7 2
10 91 85
0
69 84
65 88 83
68 87
6662 00
98
95 86
8 97 92
61 64 67 94
01 96
63 99 93
60 02
6
4
Unemployment (%)

■ Output gaps
p (actual output minus sustainable output as a
% of sustainable output)
0
1
2
3
4
5
6
7
-4
-3
-2
-1
Output gaps in selected countries: 1980-2003
0
1
2
3
4
5
6
7
-4
-3
-2
-1
UK
0
1
2
3
4
5
6
7
-4
-3
-2
-1
USA
UK
7
6
5
4
3 USA
2 UK
1
0
German
-1 y
-2
-3
-4
7
6
5
4
3 USA
2 UK
1
0
German
-1 y
Japan
-2
-3
-4

■ Output gaps
■ Complexity of the relationship between
inflation and unemployment

Unemployment and Inflation

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Unemployment and Inflation

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Unemployment

■ The meaning of ‘unemployment’

■ The meaning of ‘unemployment’

■ The meaning of ‘unemployment’

■ The duration of unemployment

To jobs OUTFLOWS To outside the

■ The duration of unemployment

■ The duration of unemployment

✜ the phase of the business cycle

■ The composition of unemployment

■ Unemployment and the labour market

■ Unemployment and the labour market

■ Unemployment and the labour market

■ Unemployment and the labour market

✜ demand-deficient (cyclical) unemployment

✜ demand-deficient (cyclical) unemployment

✜ unemployment arising from a growth in

Wage rate offered (Wo)

Wage rate acceptable

■ The aggregate demand curve

The shape of the AD curve

Shifts in the AD curve

■ The aggregate demand curve

■ short-run and long-run AS

■ The aggregate demand curve

■ The aggregate demand curve

■ The aggregate demand curve

■ International experience of inflation

■ The costs of inflation

✜ resources used to cope with inflation

✜ interaction of demand-pull and cost-push

✜ interaction of demand-pull and cost-push

✜ interaction of demand-pull and cost-push

✜ expectations and inflation

✜ interaction of demand-pull and cost-push

✜ expectations and inflation

✜ interaction of demand-pull and cost-push

✜ expectations and inflation

✜ interaction of demand-pull and cost-push

✜ expectations and inflation

■ Aggregate demand and inflation and

■ The Phillips curve

■ The 'Phillips curve' in recent times

■ The 'Phillips curve' in recent times

✜ experience of the 1980s

■ The 'Phillips curve' in recent times

✜ experience of the 1980s

✜ experience of recent years

■ The 'Phillips curve' in recent times

✜ experience of the 1980s

✜ experience of recent years

✜ a horizontal Phillips curve?

■ The 'Phillips curve' in recent times

■ The 'Phillips curve' in recent times

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