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)
UK claimant unemployment flows (millions)
UK claimant unemployment flows (millions)
UK claimant unemployment flows (millions)
 NATURE OF UNEMPLOYMENT

■ The meaning of ‘unemployment’

✜ defining the unemployment rate
✜ claimant unemployment
✦ do
claimant statistics give a true picture of
unemployment?
 NATURE OF UNEMPLOYMENT

■ The meaning of ‘unemployment’

✜ defining the unemployment rate
✜ claimant unemployment
✦ doclaimant statistics give a true picture of
unemployment?
✜ standardised unemployment (ILO/OECD)
 NATURE OF UNEMPLOYMENT

■ 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
 NATURE OF UNEMPLOYMENT

■ The duration of unemployment

✜ inflows to and outflows from the stock of
unemployment
✦ effects on the duration of unemployment
 NATURE OF UNEMPLOYMENT

■ The duration of unemployment

✜ inflows to and outflows from the stock of
unemployment
✦ effects on the duration of unemployment

✜ the phase of the business cycle

 Unemployment rates in selected industrial countries
14 UK

12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK

12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK
France
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK
France
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany
France
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany
France
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany
France USA
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany
France USA
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany Japan
France USA
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany Japan
France USA
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany Japan
France USA OECD
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 Unemployment rates in selected industrial countries
14 UK Germany Japan
France USA OECD
12
Unemployment (% of workforce)

10

0
1970 1975 1980 1985 1990 1995 2000
 NATURE OF UNEMPLOYMENT

■ 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
Unemployment and Inflation

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
 CAUSES OF UNEMPLOYMENT

■ Unemployment and the labour market

✜ aggregate demand and supply of labour
✜ equilibrium in the model
 Disequilibrium unemployment

ASL
Average (real) wage rate

We

ADL

O
Qe
No. of workers
 CAUSES OF UNEMPLOYMENT

■ Unemployment and the labour market

✜ aggregate demand and supply of labour
✜ equilibrium in the model
✜ disequilibrium unemployment
 Disequilibrium unemployment

ASL
Average (real) wage rate

B A
W2

We

ADL

O Q2 Q1
No. of workers
 CAUSES OF UNEMPLOYMENT

■ Unemployment and the labour market

✜ aggregate demand and supply of labour
✜ equilibrium in the model
✜ disequilibrium unemployment
✜ equilibrium unemployment
 Equilibrium unemployment

ASL
Average (real) wage rate

e
We

ADL

O
Qe
No. of workers
 Equilibrium unemployment

ASL N
Average (real) wage rate

e d
We

ADL

O
Qe Q2
No. of workers
 Equilibrium and disequilibrium unemployment

ASL
Average (real) wage rate

e
We

ADL

O
Qe
No. of workers
 Equilibrium and disequilibrium unemployment

ASL
Average (real) wage rate

Disequilibrium
unemployment

b a
W2
e
We

ADL

No. of workers
 Equilibrium and disequilibrium unemployment

ASL
N
Average (real) wage rate

Disequilibrium
unemployment

b a c
W2
e
We Equilibrium
unemployment

ADL

No. of workers
 CAUSES OF UNEMPLOYMENT

■ Disequilibrium unemployment
✜ real-wage (classical) unemployment
 Real-wage unemployment

ASL
Average (real) wage rate

b b’ a
W1

We

ADL 2
ADL

O Q2 Qe Q1
No. of workers
 CAUSES OF UNEMPLOYMENT

■ Disequilibrium unemployment
✜ real-wage (classical) unemployment

✜ demand-deficient (cyclical) unemployment

 Demand-deficient unemployment
ASL
Average (real) wage rate

W1

W2

ADL 1
ADL 2
O Q2 Q1
No. of workers
 CAUSES OF UNEMPLOYMENT

■ Disequilibrium unemployment
✜ real-wage (classical) unemployment

✜ demand-deficient (cyclical) unemployment

✜ unemployment arising from a growth in

the labour supply
 CAUSES OF UNEMPLOYMENT

■ 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
 CAUSES OF UNEMPLOYMENT

■ Equilibrium unemployment
✜ frictional (search) unemployment
✜ structural unemployment
 CAUSES OF UNEMPLOYMENT

■ Equilibrium unemployment
✜ frictional (search) unemployment
✜ structural unemployment
✦ changing pattern of demand
 CAUSES OF UNEMPLOYMENT

■ Equilibrium unemployment
✜ frictional (search) unemployment
✜ structural unemployment
✦ changing pattern of demand
✦ regional unemployment
 CAUSES OF UNEMPLOYMENT

■ Equilibrium unemployment
✜ frictional (search) unemployment
✜ structural unemployment
✦ changing pattern of demand
✦ regional unemployment
✦ technological unemployment
 CAUSES OF UNEMPLOYMENT

■ Equilibrium unemployment
✜ frictional (search) unemployment
✜ structural unemployment
✦ changing pattern of demand
✦ regional unemployment
✦ technological unemployment

✜ seasonal unemployment
 Unemployment and Inflation

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
 AD, AS and the PRICE LEVEL

■ The aggregate demand curve

■ The aggregate supply curve
 Aggregate demand and aggregate supply

AS
Price level

■ short-run and long-run AS

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

National output
 AD, AS and the PRICE LEVEL

■ The aggregate demand curve

■ The aggregate supply curve
■ Equilibrium
 Aggregate demand and aggregate supply

AS
Price level

Pe
b a
P2

AD

National output
 AD, AS and the PRICE LEVEL

■ The aggregate demand curve

■ The aggregate supply curve
■ Equilibrium
✜ shifts in the AD curve
 AD, AS and the PRICE LEVEL

■ The aggregate demand curve

■ The aggregate supply curve
■ Equilibrium
✜ shifts in the AD curve
✜ shifts in the AS curve
Unemployment and Inflation

Inflation
 INFLATION

■ Defining inflation

■ International experience of inflation

Inflation rates for selected countries
(average % per annum)
Inflation rates for selected countries
(average % per annum)
Inflation rates for selected countries
(average % per annum)
 Inflation rates in selected industrial countries
26
24 UK
22
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK
22
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK
22 EU 15
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK
22 EU 15
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK USA
22 EU 15
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK USA
22 EU 15
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK USA
22 EU 15 Japan
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK USA
22 EU 15 Japan
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK USA
OECD
22 EU 15 Japan
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 Inflation rates in selected industrial countries
26
24 UK USA
OECD
22 EU 15 Japan
Inflation (% increase in retail prices)

20
18
16
14
12
10
8
6
4
2
0
-2
1965 1970 1975 1980 1985 1990 1995 2000
 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
 Demand-pull inflation

AS
Price level

P1
AD2

AD1

O Q1
National output
 Demand-pull inflation

AS
Price level

P2

P1
AD2

AD1

O Q1 Q2
National output
 INFLATION

■ Types of 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

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

AS2
AS1
Price level

P2

P1

AD2

AD1

National output
 The interaction of demand-pull and cost-push inflation

AS3 AS
2
AS1

P3
Price level

P2

P1 AD3

AD2

AD1

National output
 INFLATION

■ Types of inflation
✜ demand pull
✜ cost push
✜ interaction of demand-pull and cost-push
inflation
✜ structural (demand shift)
 INFLATION

■ Types of inflation
✜ demand pull
✜ cost push
✜ interaction of demand-pull and cost-push
inflation
✜ structural (demand shift)
✜ expectations and inflation
 INFLATION

■ Types of inflation
✜ demand pull
✜ cost push
✜ interaction of demand-pull and cost-push
inflation
✜ structural (demand shift)
✜ expectations and inflation
■ Policies to tackle inflation
 INFLATION

■ Types of inflation
✜ demand pull
✜ cost push
✜ interaction of demand-pull and cost-push
inflation
✜ structural (demand shift)
✜ expectations and inflation
■ Policies to tackle inflation
✜ demand-side policies
 INFLATION

■ Types of inflation
✜ demand pull
✜ cost push
✜ interaction of demand-pull and cost-push
inflation
✜ structural (demand shift)
✜ expectations and inflation
■ Policies to tackle inflation
✜ demand-side policies
✜ supply-side policies
 Unemployment and Inflation

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 (%)

0
0 1 2 3 4 5 6
Unemployment
 RELATIONSHIP BETWEEN
INFLATION AND 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

6
65
4 6662
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
Inflation (%) The breakdown of the Phillips curve?
26

24

22

20

18

16

14

12

10

6
65 Original Phillips curve
4 6662
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
Inflation (%) The breakdown of the Phillips curve?
26

24

22

20

18

16 74

14

12

10
7 7
3 1
8
7
7 2
6
0
69
65
68
4 6662
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
Inflation (%) The breakdown of the Phillips curve?
26
75
24

22

20

18
76
16 74 77
14
79
12

10
7 7
3 1 78
8
7
7 2
6
0
69
65
68
4 6662
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
 RELATIONSHIP BETWEEN
INFLATION AND UNEMPLOYMENT

■ The 'Phillips curve' in recent times

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

✜ experience of the 1980s

Inflation (%) The breakdown of the Phillips curve?
26
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10
7 7
3 1 78 82
8
7
7 2
6 85
0
69 84
65 83
68
4 6662
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
 RELATIONSHIP BETWEEN
INFLATION AND UNEMPLOYMENT

■ 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

Inflation (%) The breakdown of the Phillips curve?
26
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10 90
7 7
3 1 78 89 82
8
7
7 2
6 91 85
0
69 84
65 88 83
68 87
4 6662 95 86
92
61 64 67 94
2 93
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
 RELATIONSHIP BETWEEN
INFLATION AND UNEMPLOYMENT

■ 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?

Inflation (%) The breakdown of the Phillips curve?
26
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10 90
7 7
3 1 78 89 82
8
7
7 2
6 91 85
0
69 84
65 88 83
68 87
4 6662 00
98
95 86
97 92
61 64 67 94
2 01 96
63 99 93
60 02
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)
 RELATIONSHIP BETWEEN
INFLATION AND UNEMPLOYMENT

■ 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
 Output gaps in selected countries: 1980-2003
7
Output gap (actual output minus sustainable output as a

6
5
4
3
% of sustainable output)

2
1
0
-1
-2
-3
-4
-5
-6
1980 1985 1990 1995 2000
 Output gaps in selected countries: 1980-2003
7
Output gap (actual output minus sustainable output as a

6
5
4
3
% of sustainable output)

2
1
UK
0
-1
-2
-3
-4
-5
-6
1980 1985 1990 1995 2000
 Output gaps in selected countries: 1980-2003
7
Output gap (actual output minus sustainable output as a

6
5
4
3
% of sustainable output)

2 USA
1
UK
0
-1
-2
-3
-4
-5
-6
1980 1985 1990 1995 2000
 Output gaps in selected countries: 1980-2003
7
Output gap (actual output minus sustainable output as a

6
5
4
3
% of sustainable output)

2 USA
1
UK
0
-1
-2
Germany
-3
-4
-5
-6
1980 1985 1990 1995 2000
 Output gaps in selected countries: 1980-2003
7
Output gap (actual output minus sustainable output as a

6
5
4
3
% of sustainable output)

2 USA
1
UK
0
-1
-2
Germany
-3
-4 Japan
-5
-6
1980 1985 1990 1995 2000
 RELATIONSHIP BETWEEN
INFLATION AND UNEMPLOYMENT

■ 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