Unemployment and Inflation: The Inverse Correlation

MACROECONOMICS

Table of Contents
Introduction......................................................................................................................................2
Literature review..............................................................................................................................2
Relation between Unemployment and Inflation..............................................................................3
Phillips Curve..................................................................................................................................4
The Bottom Line..............................................................................................................................5
Conclusion.......................................................................................................................................5
Reference.........................................................................................................................................6
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Introduction
Unemployment and inflation are the two significant economic indicators of an economy of a
country. As far as the economic development and growth of a specific country is considered,
there should be a low level of unemployment in the economy in order to have a high growth in
future. This inverse correlation between unemployment and the level of inflation introduced by
A.W. Phillips is a major step in macroeconomics. Inflation represents a certain situation in an
economy when the general level of the commodity price is high.
In this study, it will be discussed what exactly the level of unemployment and inflation rate
means and how these two economic indicators are affected by the other economic factors. Then
the relationship between unemployment and inflation and its impact on the growth of an
economy will be discussed.
Literature review
According to Yelwa, David & Awe (2015), there is an inverse relationship between the two main
economic indicators which is inflation and unemployment. At a first glance, the inverse
relationship between inflation and unemployment may look simple. But the inverse correlation
between these two economic indicators is more complicated than it appears to be. In this study, it
will be discussed how the relationship between inflation and unemployment affects the overall
economy of a country in a broader prospect.
According to Sassen (2018), unemployment is one of the biggest problems that the economy of
most of the countries of the world is facing nowadays. The labour force of a country is divided
into two categories which is employed labour force and unemployed labour force. According to
Galí, (2015),the problem of unemployment represents the potential production that the country
could have produced in a specific period of time and that is why the problem of unemployment is
one of the main concerns for the economy of every country. The proper unemployment rate of a
country differs from the official unemployment rate of that country as official unemployment
represents those civilians who are not receiving any wages and exclude those civilians who are
not willing to do any job. There are few different types of Unemployment that exists in an
economy i.e frictional unemployment, cyclical unemployment and structural unemployment.
Frictional unemployment causes when people are in the process of moving from one job to
another. Fresh college graduates are example of this type of unemployment. Frictional
unemployment cannot be fully avoided and does not pose a threat to the economy of a country.
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