Data Bases • Custom Term Papers • Free Term Papers • Free Research Papers • Free Essays • Free Book Reports • Plagiarism? Links • Top 100 Term Paper Sites • Top 25 Essay Sites • Top 50 Essay Sites • Search 97,000 Papers @ DirectEssays.com • Search 101,000 Papers @ ExampleEssays.com • Search 90,000 Papers @ MegaEssays.com Free Essays • Term Paper Sites • Chuck III's Free Essays • Free College Essays • TermPaperSites.com • My Term Papers • Get Free Essays • Essay World • Planet Papers	Search Lots of Essays Back to Subjects - Business None Provided23 None Provided23 The relationship between inflation and unemployment is often taken to be one of the most reliable in macroeconomics. Everyone knows that rising unemployment means lower inflation, and falling unemployment means higher inflation. No single economic statistic attracts more notice or implies more about the well being of the social system than does the unemployment rate. The moral and economic waste brought on by recurring waves of unemployment has always been one of the principal reproaches directed at the system by its critics. Previously, to be without work was to be involuntarily idle, and unemployment tended to be seen as an individual matter rather than a social concern beyond the will of the persons involved. To be without work was more of leisure than what we would call unemployment today. Mass unemployment gradually came largely due to the pursuit of economic self-interest and an extensive division of labor. Apart from unemployment that is the result of an inadequate level of aggregate demand, important categories are frictional, structural, and seasonal unemployment. Structural unemployment is another cause that creates unemployment. As time goes on, consumer’s demand changes, which cause a growth in one industry, a decrease in another or it may lead to a complete shut down of an industry. And even though jobs will increase in growing industry, they will decrease or disappear in another. Thus structural unemployment causes regional unemployment because certain areas are unable to attract new industries when their old ones are shut down. Seasonal unemployment mostly depends on the climate and therefore varies in the regions of Canada. In the wintertime industries like fishing, construction, and tourism struggle in certain regions. However, demand in some industries like snow cleaning will increase. The other examples where people could be seasonally unemployed are farming, lumbering and etc. People who work in those industries are usually employed for six month and unemployed for the other six when there industry is off-season. Frictional unemployment is the unemployment that corresponds to job vacancies in the same occupations and locations. Some workers will be frictionally unemployed because of job search. Workers will try to better themselves when they perceive a chance of an improved employment situation by leaving their present employer. For example, moving from a job paying a low wage to a higher paying position will tend to be associated with higher productivity in the new position, leading to an increase in economic output. In this case the worker gains, and so does society. An economy where workers are not involved in self-interested job searches would not be economically progressive. Even if the size of the labor force remained the same, new workers are likely to join the frictionally unemployed, while others will be leaving the labor force. There are two types of demand deficient unemployment. The first is cyclical unemployment and the second is chronic unemployment. Cyclical unemployment results from a general lack of demand for labor. When the business cycle turns downward, demand for services and goods drop. Consequently, workers begin to be laid off. Chronic unemployment is caused by factors beyond the control of the individual workers. If it is long lasting, the rise of unemployment will not have an even occurrence on the entire labor force. As the workers are laid off, the fall in consumption will have its most severe impact on the purchases of cars, appliances, etc. Workers in those industries will bare the brunt of unemployment. The remedy for demand deficient unemployment is government intervention through macro-economic monetary and fiscal policies. Economists believe that in order for the economy to expand and grow, there has to be some level of inflation. Therefore, the opposite holds true as well. If you want to lower inflation, you have to accept a semi-standard economy. They call this tradeoff the Phillips Curve. The Phillips Curve is thought to be the “proper” way of balancing economic growth and inflation. For this reason the Federal Reserve is always looking for the perfect equilibrium at which we can maximize our economic growth while keeping inflation as minimal as possible. They do this by increasing and decreasing interest rates. Although, Economists and the Federal Reserve abide by the Phillips Curve as a general rule for not letting inflation get out of hand, it has been proven many times in the past that it is possible to have a very healthy and prosperous economy without raising inflation at all. I have concluded that inflation is definitely an unwanted and usually unneeded aspect of a good economy. The main concept of the Phillips Curve is fine; it just needs to be updated. They need to reevaluate the weight of the prices for the different goods. They also need to update the overall list of important goods in the typical budget. This new listing would have to include all the latest goods that were not as important in the past. The Phillips Curve should also start taking into consideration the ratio of the quality that the good has increased to the price that it has increased. This would show a truer relation of the prices of goods to the inflation of the economy. I can see the Federal Reserves reasoning behind raising interest rates to slow down the economy and lower inflation, but they need to realize that the rate of inflation is not completely dependant upon the rise and fall of the economies well being. The past has proven to us numerous times that the economy is quite capable of being stable and prosperous without affecting the inflation rate in a negative way. That’s why I feel that it would be in the nations best interest to continue letting the economy expand into bigger and better things without raising interest rates to unneeded proportions. The Phillips curve, the observed relationship between inflation and the unemployment rate, has long been a mainstay of market and policy analysis of inflation in the United States. Macroeconomic forecasters and policymakers alike have relied on the Phillips curve to provide a reading of the likely path for inflation in the period ahead. The unemployment rate has fallen in the 1990s, but the expected subsequent increase in inflation has not occurred. Some have attempted to explain this in terms of developments in the labor market, specifically, increased fears of job loss. However, measures of job insecurity do not help to explain why the Phillips curve has been less reliable than in the past. Other factors, such as the behavior of labor costs other than wages, fluctuations in the value of the US dollar, and other developments affecting the markup of prices over wages, more likely explain the unusually subdued behavior of inflation in the United States. Of course, many factors other than wages influence prices. The cost of intermediate inputs, such as energy, is one example. Also, firms set prices and workers bargain for wages based, in part, on the general level of prices they expect to prevail in the future. This has led some forecasters and policy analysts to add past inflation and prices of inputs such as oil to their Phillips curves. Some have argued that inflation has declined because of a decline in the natural rate of unemployment. If this were the case, at least some of the recent decrease in unemployment would be due to structural changes in the labor market and would not result in a tighter labor market. Simply reversing the Phillips curve to yield the rate implied by observed inflation and unemployment rates can test this argument; such a test implies that the long-run natural rate is about 3.75 percent. This is hard to believe; the actual US unemployment rate has not been that low since 1969 and the figure is well below statistical estimates of the natural rate. An alternative explanation is based on job insecurity. Unreliable evidence about layoffs and corporate downsizing suggests that US workers are more uncertain about job prospects than in the past. This uncertainty could explain low inflation in the face of a tight job market: workers might be reluctant to ask for wage increases. There are many ways to measure job uncertainty, including survey measures, wage increases in collective bargaining arrangements, days idle because of work stoppages such as strikes, and the number of workers who have become unemployed because they were terminated (rather than because they quit their jobs). What, then, can explain the recent behavior of US inflation? A hint is given by the step we omitted: the markup of prices over wages. Since recent changes in the unemployment rate seem consistent with the behavior of wages but not with the behavior of prices, logically there must have been some change in the relationship of prices to wages. Such a change could take two forms. First, firms could be adjusting their profit margins, assuming that costs other than wages have evolved normally. Second, costs other than wages could have fallen, assuming that profit margins have been stable. There is not much support for the idea that lower inflation reflects squeezed profit margins. It has been suggested that increased globalization and competition may have restrained prices; there is anecdotal evidence of a general feeling among businesses that consumers will not tolerate price increases. However, the profits of US firms have been buoyant in recent years. If competition is affecting firms' behavior, it is more likely manifested in cost containment than in less aggressive price increases. Finally, actual inflation can be influenced by expected inflation through the wage- setting process. For example, workers may respond to higher expected inflation by demanding higher wages, and firms may, in turn, raise prices to offset rising costs. If expected inflation is partly conditioned by past experience with inflation, then periods of low inflation like the early 1990s might create a "virtuous circle" of low expected inflation that leads to low actual inflation. Bibliography: Word Count: 1641
Copyright © 1998-2008 College Term Papers, INC All Rights Reserved. DMCA Notifications and Requests