What is the relationship between inflation and unemployment?
The relationship between inflation and unemployment has been a theme of a big debate since the mid -20th century. Initially, it was assumed that there was an inverse relationship between the two economic variables - this connection is called the Phillips curve. However, the 1970s showed a period of high inflation and high unemployment. The economists then largely left Phillips curve and believed that there was no long -term connection between these two factors. Despite this development, many economists continue to accept a short -term connection between inflation and unemployment reminiscent of Phillips curve.
The first widely modified research of the inflation rate and unemployment was conducted by New Zealand economist William Phillips in 1958. Phillips examined the economy of the United Kingdom from 1861 to 1957 and concluded that there was an inverse relationship between the wages. Others took Phillipsa's data anabids an explicit connection between inflation and unemployment. This inverse relationship has become known as PHillips curve.
In the age of 60, many economists believed that Phillips curve offered a compromise between inflation and unemployment. If the country was willing to tolerate slight inflation, it could look forward to low unemployment. Likewise, if she wanted a low inflation, she would have to face higher unemployment. Economic statistics seemed to have confirmed the theory over 60 years.
In 1968, the US economist Milton Friedman proposed that there is no long -term connection between inflation and unemployment. Three years later, the growth of inflation and unemployment rates began to grow in industrial countries. The US economy during 1975 had inflation at 9.3% and unemployment 8.3%. This data was contrary to the predictions of Phillips curves, which indicates both rates. The phenomenon of high inflation and high unemployment lasted from 1971 to 1984 and was called stagflation.
after a hundredGflation most economists refused the validity of the Phillips curve. The consequence of this paradigm shift was that the governments had shifted from direct interference into their economies through fiscal policy. Now they tended to prefer monetary policy to control inflation. The free market has been left to adapt to economic disorders.
Around this time, the idea of the natural unemployment rate was offered. Basically, the natural unemployment rate means that inflation does not have a long -term relationship to unemployment. There are a number of reasons for natural unemployment, including technological changes and voluntary unemployment. While the natural unemployment rate would return in the long term, many economists continued to defend Phillips curve as a short -term economic compromise.