09. unemployment and inflation

UnemploymentUnemploymentand Inflationand Inflation

Unemployment and Inflation

Nature of Unemployment

The meaning of ‘unemployment’ defining the unemployment rate claimant unemployment

NATURE OF UNEMPLOYMENT

UK claimant unemployment flows (millions)





do claimant statistics give a true picture of unemployment?



do claimant statistics give a true picture of unemployment?

standardised unemployment (ILO/OECD)


The duration of unemployment inflows to and outflows from the stock of

unemployment


•School/college leavers•People returning to the labour force (e.g. after raising children)

•People made redundant•People sacked•People temporarily laid off•People resigning

UNEMPLOYMENT

INFLOWS(per period of time)

From jobs From outside the labour forceFlows into and out of unemployment

•People made redundant•People sacked•People temporarily laid off•People resigning

UNEMPLOYMENT

OUTFLOWS(per period of time)

To jobs To outside thelabour force

•People taking new jobs•People returning to old jobs who had been temporarily laid off

•People who have become disheartened and give up looking for a job•People who have reached retirement age•People who temporarily withdraw from labour force (e.g. to raise a family)•People who emigrate•People who die

INFLOWS(per period of time)

From jobs From outside the labour force•School/college leavers•People returning to the labour force (e.g. after raising children)

Flows into and out of unemployment


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 countriesUK

0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UK

0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

Unemployment rates in selected industrial countries

0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance

Germany


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance

Germany


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance USA

Germany


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance USA

Germany


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance USA

Germany Japan


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance USA

Germany Japan


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance USA

Germany JapanOECD


0

2

4

6

8

10

12

14

1970 1975 1980 1985 1990 1995 2000

Une

mpl

oym

ent (

% o

f wor

kfor

ce)

UKFrance USA

Germany JapanOECD


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

Unemployment and the labour market aggregate demand and supply of labour

CAUSES OF UNEMPLOYMENT

Disequilibrium unemployment

O

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL


equilibrium in the model


Qe


O

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL

We



disequilibrium unemployment


O

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL

We

W2


Q2 Q1

B A



disequilibrium unemployment

equilibrium unemployment


Equilibrium unemployment

O

Ave

rage

(rea

l) w

age

rate

No. of workers

ADL

We

ASL

e

Qe

Q2QeO

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL

We

N

e d

Equilibrium unemployment

Equilibrium and disequilibrium unemployment

O

Ave

rage

(rea

l) w

age

rate

No. of workers

ADL

We

e

Qe

ASL

O

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL

We

W2

b a

e

Disequilibriumunemployment


O

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL

We

W2

b a

e

N

c

Equilibriumunemployment

Disequilibriumunemployment



real-wage (classical) unemployment


O

Ave

rage

(rea

l) w

age

rate

No. of workers

ASL

ADL

We

W1

QeQ2 Q1

ADL 2

b’

Real-wage unemployment

b a



demand-deficient (cyclical) unemployment


ADL 2

O

Ave

rage

(rea

l) w

age

rate

No. of workers

ADL 1

W1

Q1Q2

W2

ASL

Demand-deficient unemployment



demand-deficient (cyclical) unemployment

unemployment arising from a growth in the labour supply


Equilibrium unemployment frictional (search) unemployment


O

Wag

e ra

te

Period of search

t l

Wage rate offered (Wo)

Wage rate acceptable to worker (Wa)

Average duration of unemployment

Equilibrium unemployment frictional (search) unemployment structural unemployment



changing pattern of demand



changing pattern of demand regional unemployment



changing pattern of demand regional unemployment technological unemployment



changing pattern of demand regional unemployment technological unemployment

seasonal unemployment



Aggregate Demand, Aggregate Supply and

the Price Level

The aggregate demand curve

AD, AS and the PRICE LEVEL

O

Pric

e le

vel

National output

AD

Aggregate demand and aggregate supplyWhy the AD curve slopes downwards

foreign trade effect

real balance effect

interest rate effect

The shape of the AD curve

Shifts in the AD curve


The aggregate supply curve


O

Pric

e le

vel

National output

AS

short-run and long-run AS curves

the shape of the AS curve

shift in the AS curve

Aggregate demand and aggregate supply



Equilibrium


O

Pric

e le

vel

National output

AS

AD

Pe

P2

ab

Aggregate demand and aggregate supply



Equilibrium shifts in the AD curve




Equilibrium shifts in the AD curve

shifts in the AS curve



Inflation

Defining inflation

International experience of inflation

INFLATION

Inflation rates for selected countries(average % per annum)



UK

Inflation rates in selected industrial countries

-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UK

-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)Inflation rates in selected industrial countries

-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UKEU 15


-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UKEU 15


-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UKEU 15

USA


-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UKEU 15

USA


-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UKEU 15 Japan

USA


-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices

)

UKEU 15 Japan

USA


UKEU 15 Japan

USA OECD

-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices


UKEU 15 Japan

USA OECD

-202468

101214161820222426

1965 1970 1975 1980 1985 1990 1995 2000

Infla

tion

(% in

crea

se in

reta

il pr

ices


The costs of inflation

redistribution

uncertainty

balance of payments

resources used to cope with inflation

INFLATION

Types of inflation demand pull

INFLATION

Demand-pull inflation

O

Pric

e le

vel

National output

AS

AD1

P1

Q1

O

Pric

e le

vel

National output

AS

AD1

P1

Q1

AD2


O

Pric

e le

vel

National output

AS

AD1

P1

Q1

AD2

P2

Q2


Types of inflation demand pull cost push

INFLATION

Cost-push inflation

O

Pric

e le

vel

National output

AS1

AD

P1

Q1

O

Pric

e le

vel

National output

AS1

AD

P1

Q1

AS2

Cost-push inflation

O

Pric

e le

vel

National output

AS1

AD

P1

Q1

AS2

P2

Q2

Cost-push inflation

Types of inflation demand pull cost push interaction of demand-pull and cost-push

inflation

INFLATION

The interaction of demand-pull and cost-push inflation

O

Pric

e le

vel

National output

AS1

AD1

P1

O

Pric

e le

vel

National output

AS1

AD1

P1

AS2

AD2

P2


O

Pric

e le

vel

National output

AS1

AD1

P1

AD2

P2

AS3

AD3

P3


AS2


inflation structural (demand shift)

INFLATION


inflation structural (demand shift) expectations and inflation

INFLATION



Policies to tackle inflation

INFLATION



Policies to tackle inflation demand-side policies

INFLATION



Policies to tackle inflation demand-side policies supply-side policies

INFLATION


Relationship between Unemployment and

Inflation

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

RELATIONSHIP BETWEENINFLATION AND UNEMPLOYMENT

0

1

2

3

4

5

6

7

8

9

0 1 2 3 4 5 6

The original Phillips curve

Unemployment (%)

Wag

e in

flatio

n (%

)

The 'Phillips curve' in recent times

the breakdown of the Phillips curve and the problem of stagflation in the 1970s


Inflation (%)

Unemployment (%)

The breakdown of the Phillips curve?

6763

6265

6664

60

61

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Inflation (%)

Unemployment (%)


6763

6265

6664

60

61

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Original Phillips curve

74

7173

7072

Inflation (%)

Unemployment (%)


6968

6763

6265

6664

60

61

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13

75

7476

77

79

7173

7072

78

Inflation (%)

Unemployment (%)


6968

6763

6265

6664

60

61

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13



experience of the 1980s


0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13

75

74

8076

77

79

7173

7072

78 82

8384

85

81

Inflation (%)

Unemployment (%)


6968

6763

6265

6664

60

61




experience of recent years


75

74

8076

77

79

7173

7072

78

90

89

9188

95

82

8384

85

86

93

8792

94

81

Inflation (%)

Unemployment (%)


6968

6763

6265

6664

60

61

0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13




experience of recent years

a horizontal Phillips curve?


0

2

4

6

8

10

12

14

16

18

20

22

24

26

0 1 2 3 4 5 6 7 8 9 10 11 12 13

75

74

8076

77

79

7173

7072

78

90

89

9796

9188

95

82

8384

85

86

93

8792

94

81

Inflation (%)

Unemployment (%)


6968

6763

6265

6664

60

6199

9800

0102

The 'Phillips curve' in recent times the breakdown of the Phillips curve and the

problem of stagflation in the 1970s experience of the 1980s experience of recent years a horizontal Phillips curve?

Output gaps


-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000Out

put g

ap (a

ctua

l out

put m

inus

sus

tain

able

out

put a

s a

% o

f sus

tain

able

out

put)

Output gaps in selected countries: 1980-2003

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000Out

put g

ap (a

ctua

l out

put m

inus

sus

tain

able

out

put a

s a

% o

f sus

tain

able

out

put)


UK

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000Out

put g

ap (a

ctua

l out

put m

inus

sus

tain

able

out

put a

s a

% o

f sus

tain

able

out

put)


UK

USA

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000Out

put g

ap (a

ctua

l out

put m

inus

sus

tain

able

out

put a

s a

% o

f sus

tain

able

out

put)


UK

USA

Germany

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000Out

put g

ap (a

ctua

l out

put m

inus

sus

tain

able

out

put a

s a

% o

f sus

tain

able

out

put)


UK

USA

Germany

Japan

The 'Phillips curve' in recent times the breakdown of the Phillips curve and the

problem of stagflation in the 1970s experience of the 1980s experience of recent years a horizontal Phillips curve?

Output gaps Complexity of the relationship between

inflation and unemployment


Education

09. unemployment and inflation