Unemployment and Inflation: Analysis of the Phillips Curve in the US Economy

Running Head: UNEMPLOYMENT AND INFLATION
Unemployment and Inflation
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1UNEMPLOYMENT AND INFLATION
Table of Contents
Introduction......................................................................................................................................2
Literature Review............................................................................................................................3
Data: Summary Statistics.................................................................................................................7
Methods and results.........................................................................................................................9
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

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Introduction
The economy of different countries and the dynamics experienced in the path of progress
of the same, in turn depends on the performance of the different indicators and economic
variables, which by measuring the progress of the economy of the concerned country in different
aspects, highlight the overall position of the economy of the country in the global scenario as
well as the economic well-being of the population of the concerned countries (Agénor &
Montiel, 2015).
The different economic indicators of immense importance, which are usually taken into
account for measuring the economic progress and condition of different countries across the
globe primarily include those of the Gross Domestic Product, the level of unemployment, price
levels as well as the import export dynamics of the countries (Agénor & Montiel, 2015). Of
these, the level of unemployment acts as a significant indicator as much of the economic well-
being of the population of the country as well as the overall health of the economy as a whole
and its productivity and prosperity depend inversely on the same.
There are different factors in the economy, which also have considerable influences on
the unemployment dynamics of the countries in a period of time. One of such factors is that of
the inflation scenario or the average levels of prices prevailing in an economy at a point of time.
According to the theory of Phillips Curve, there lies an inverse relationship between these two
economic indicators with the logic being increase in economic growth leads to an overall
increase in the productivity as well as inflation due to high demand for commodities and
services, which in turn is expected to create more employment scopes, thereby decreasing
unemployment in the economy (Fitzgerald & Nicolini, 2014). Keeping this into consideration,
the concerned report tries to analyse the influence of the price levels in the USA on the

3UNEMPLOYMENT AND INFLATION
unemployment dynamics of the same, thereby trying to compare the results derived from
analysis of the empirical evidences collected, with the conventional theory of Phillips Curve in
economics.
Literature Review
Introduction
This section of the report tries to conduct an extensive review of the literary evidences and
empirically supported scholarly works present in the contemporary global scenario, which
highlight the relationship between the inflation and unemployment, both in the global context as
well as specifically in the context of the economy of the United States of America.
Inflation and Unemployment: Definition and Implications
There have been various explanations and definitions of the terms “Inflation” and
“Unemployment”. However, one of the most comprehensive definition of unemployment can be
seen to be provided by Mankiw (2014), according to whom, unemployment is the situation
where some people of working age and with eligibility to work are not able to get a job in spite
of being willing to do the same. However, Galí, Smets & Wouters (2012), highlights the grey
area of “Voluntary Unemployment”, which refers to those individuals who by choice do not take
up employments in spite of being eligible to work.
In this context, Goodwin et al. (2015) defines the different types of unemployment, which
generally exist in an economy as follows:
Structural Unemployment- This type of unemployment (generally long-term in nature) occurs in
an economy when the skill set of the existing workers do not match with those required for the