30
Unemployment, NAIRU and the Phillips Curve

Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Embed Size (px)

Citation preview

Page 1: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Unemployment,NAIRU andthe Phillips Curve

Page 2: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Unemployment, NAIRU and the Phillips Curve

Page 3: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Types of Unemployment

Unemployment caused when people move from job to job and claim benefit in the meantime

Search or Frictional Unemployment:

Page 4: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Types of Unemployment

Unemployment caused as a result of the decline of industries and the inability of former employees to move into jobs being created in new industries

Structural Unemployment:

Page 5: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Types of Unemployment

Unemployment caused because the job can only be done at certain times of the year tourism, skiing, cricketers, beach lifeguards, etc.

Seasonal Unemployment:

The demand for lifeguard services tends to exist in the summer but nothing like as much in the winter –

Copyright: Swiassmautz, http://www.sxc.hu

Page 6: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Types of Unemployment

Caused by a general lack of demand in the economy – this type of unemployment may be widespread across a range of industries and sectors

Keynes saw unemployment as primarily a lack of demand in the economy which could be influenced by the government

Cyclical or Demand Deficient

A fall in aggregate demand can lead to a decline in spending forcing businesses across the economy into closing with damaging effects on employment as a result.

Copyright: Beeline, http://www.sxc.hu

Page 7: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Types of Unemployment

Unemployment caused when developments in machines and computers replace human effort – e.g in manufacturing, administration etc.

Technological Unemployment:

Page 8: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Unemployment

Keynesian Unemployment:

Unemployment in the long run may remain high because of imperfections in the market – ‘sticky wages’

Page 9: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Inflation

Page 10: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

What is Inflation?

The rate at which P for goods and services

purchasing power

Inflation is measured by CPI Consumer Prices Index

Page 11: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

How is Inflation measured?

Page 12: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Causes of Inflation

Demand Pull Rising AD

Cost Push Diminishing resources External Shocks Wage Push M prices rising. Tax Push

Page 13: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Inflation 1993 - 2017

Page 14: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime
Page 15: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime
Page 16: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Who Loses from inflation?

Creditors Businesses Especially with a high PED The country as a whole

Page 17: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Who gains?

Debtors Businesses with a low PED? People with assets with high

inflation

Page 18: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Inflation and Unemployment using AS/AD

Inflation

Real National Income

AD1

AS1

2%

U = 4%

Assume the economy has an inflation rate of 2% and a level of national income giving an unemployment rate of 4%. AD rises for some reason.

AD2

U = 3%

3.75%

The AD a unemployment but inflationary pressures push inflation up to 3.75%. Producers try to expand output but at increased cost – employing more expensive capital, paying workers more to do work etc. Increased cost results in a shift in AS to the left – workers start to be laid off.

AS2

4.0%

The short run unemployment is only temporary; as AS shifts, unemployment and the economy will end up in the long run in a position with unemployment at 4% but with higher inflation. Expansionary fiscal or monetary policy will only → in unemployment in the short run. In the long run unemployment will return to its natural rate. Attempts to reduce unemployment below the natural rate will be inflationary.

Page 19: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips Curve

1958 – Professor A.W. Phillips There is statistical relationship between

the rate of growth of money wages and unemployment from 1861 – 1957

Rate of growth of money wages linked to inflationary pressure

Led to a theory = there is a trade-off between inflation and unemployment

Page 20: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips CurveWage growth % (Inflation)

Unemployment (%)

The Phillips Curve shows an inverse relationship between inflation and unemployment. It suggested that if governments wanted to reduce unemployment it had to accept higher inflation as a trade-off.

Money illusion – wage rates rising but individuals not factoring in inflation on real wage rates.

1.5%

6%4%

2.5%

PC1

Page 21: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips Curve

Problems: 1970s – Inflation

and unemployment rising at the same time – stagflation

Phillips Curve redundant? Or was it moving?

Page 22: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime
Page 23: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime
Page 24: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips CurveWage growth % (Inflation)

Unemployment (%)

An inward shift of the Phillips Curve would result in lower unemployment levels associated with higher inflation.

1.5%

6%4%PC1

3.0%

PC2

Page 25: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips CurveInflation

Unemployment

Long Run PC

PC3

PC2PC1

Assume the economy starts with an inflation rate of 1% but very high unemployment at 7%. Government takes measures to reduce unemployment by an expansionary fiscal policy that pushes AD to the right (see the AD/AS diagram on slide 15)

7%

2.0%

1.0%

There is a short term fall in unemployment but at a cost of higher inflation. Individuals now base their wage negotiations on expectations of higher inflation in the next period. If higher wages are granted then firms costs rise – they start to shed labour and unemployment creeps back up to 7% again.

3.0%

To counter the rise in unemployment, government once again injects resources into the economy – the result is a short-term fall in unemployment but higher inflation. This higher inflation fuels further expectation of higher inflation and so the process continues. The long run Phillips Curve is vertical at the natural rate of unemployment. This is how economists have explained the movements in the Phillips Curve and it is termed the Expectations Augmented Phillips Curve.

Page 26: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Friedman’s Criticisms Friedman said the relationship only held

in the short run In the long run there was no trade off The position of the PC was determined

by peoples’ expectations of inflation. then the curve would shift outwards and

vice versa. This was the EXPECTATIONS

AUGMENTED PHILLIPS CURVE

Page 27: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

Searching for the Phillips Curve

What factors cause people to change their inflation expectations?

Shocks (oil price changes) Macroeconomic policy

mismanagement

Page 28: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

NAIRU

U* = Nairu If U <U* inflationary expectations

rise, therefore Inflation will accelerate

If U=U* stability If U>U* disinflation.

Page 29: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips Curve

To reduce unemployment to below the natural rate would necessitate:

Influencing expectations – persuading individuals that inflation was going to fall

Boosting the supply side of the economy - increase capacity (pushing the PC curve outwards)

Page 30: Unemployment, NAIRU and the Phillips Curve. Types of Unemployment Unemployment caused when people move from job to job and claim benefit in the meantime

The Phillips Curve

Supply side policies have been focused on:

Education: Boosting the number of those staying on at

school Boosting numbers going to university Lifelong learning Vocational education