Inflation and unemployment


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Inflation and unemployment

  1. 1. Inflation and Unemployment A2 Economics
  2. 2. Content• The causes and consequences of unemployment• The natural rate of unemployment hypothesis• The phillips curve• The causes and consequences of inflation
  3. 3. Unemployment• There are a number of types of unemployment: – Structural unemployment – Cyclical unemployment – Frictional unemployment• Structural unemployment occurs when the economy changes and industries die out• Training is needed to give the unemployed workers new skills
  4. 4. Unemployment• Cyclical unemployment is caused by the business cycle• Frictional unemployment is caused when people are temporarily out of work as they are moving jobs
  5. 5. Unemployment and PPF• Unemployment means that scarce economic resources are being wasted reducing the long run potential of the economy• Where there are high levels of unemployment an economy will be operating inside the perimeters of its PPF
  6. 6. Unemployment and AD / AS• As Aggregate demand increases unemployment will decrease• Supply side policies can be used to increase aggregate supply in the economy and thereby reduce the level of unemployment• However if the growth in the level of aggregate demand is less than the underlying trend growth in output unemployment is likely to occur
  7. 7. Causes and Consequences of Unemployment• Unemployment is caused by demand and supply side factors• On the demand side if the demand curve shifts inwards unemployment will rise• Supply side factors such as an excess of supply of workers also means unemployment will increase
  8. 8. Policies that increase labour market flexibility• A number of policies can be implemented to increase market flexibility and reduce unemployment• Policies can be implemented on the supply side and the demand side by the government
  9. 9. Supply side policies• Supply side policies include:• Reducing the occupational mobility of labour – this can be through providing training for the unemployed, increasing the availability and quality of education and providing incentives for people to work
  10. 10. Demand side policies• Employment subsidies can be used by the government to encourage businesses to give jobs to the long term unemployed
  11. 11. Effects of Unemployment• On an individual level unemployment reduces the level of income that an individual earns• As their income has been reduced consumption also reduces as they pay for necessities rather than luxuries• Goods that are income elastic will be consumed less• Quality of life will be reduced for the unemployed worker• Workers may become discouraged and give up searching for jobs becoming part of the long term structural unemployment in the UK
  12. 12. Effects of Unemployment• Unemployment can have significance effects on the performance of the economy as a whole• The effects are most marked due to long terms unemployment• If there is unemployment in the economy resources are not being used effectively and the economy will be operating below any points on the PPF curve
  13. 13. Economic effects of unemployment• If unemployment rates are rising their will be a negative impact on economic growth potential• Consumption is likely to fall as consumers will have had a decrease in income levels• Government spending will increase as the government will be responsible for benefit payments• Taxation levels will decrease as less people are in work and therefore paying taxes
  14. 14. Natural Rate of Unemployment Hypothesis• The natural rate of unemployment recognizes that there will always be some level of unemployment in an economy• At the natural rate all unemployment will be voluntary• This is the employment rate when the economy is operating at full employment
  15. 15. Determinants of the natural rate• The natural rate is determined by the interaction of the demand for labour and the supply of labour• At the equilibrium wage rate all people who want a job can get a job• However at this wage rate their will be some people who choose not to work
  16. 16. Natural rate of unemployment and policy• If governments want to reduce the natural rate of unemployment they need to concentrate on supply side policies• If the benefits system is relatively high in a country it will cause less people to want to work
  17. 17. Summary• There are three main types of unemployment: – Structural – Cyclical – Frictional• Unemployment means that an economy cant operate on its ppf• As AD increases unemployment decreases• The natural rate of unemployment recognises there will always be some level of unemployment in the economy• The Phillips curve shows an inverse relationship between unemployment and inflation• Inflation is a rise in the general level of prices• There are two causes of inflation: – Cost push – Demand pull