Relation Between Inflation Rate and Unemployment

Eurozone unemployment rose to a record high in January, while inflation in the currency bloc has also continued its upward trend - a combination described by economists as "unpalatable" and a "double whammy of bad news".

The jobless rate in the 17-member currency bloc was 10. 7 per cent in January, up from 10. 6 per cent in December, according to statistics published today by Eurostat. It means that, in January, there were 16.

9 million people out of work in the eurozone.Meanwhile in the European Union as a whole, unemployment increased from 10 per cent in December to 10. per cent in January, leaving 24. 3 million people without a job. Spain continued to suffer the highest jobless rate in the eurozone at 23.

3 per cent, as well as the highest youth unemployment at 49. 9 per cent. It was followed by Greece, which had an jobless rate of 19. 9 per cent in November, the latest available figure. In Italy, unemployment hit 9.

4 per cent in January, its highest level since 2001. The lowest rates were in Austria, 4 per cent, the Netherlands, 5 per cent and Luxembourg, 5. 1 per cent.In a separate report, Eurostat estimated that euro area inflation crept up to 2. 7 per cent in February, compared with 2. 6 per cent in January.

Howard Archer, chief European economist at IHS Global Insight, said it was a "double whammy of bad news for the eurozone". The rise in inflation was "particularly bad news for consumers", he said, because they faced not only high unemployment but squeezed purchasing power. Hopes that inflation would fall had been "scuppered" by high oil prices, Archer added in a research note.With the eurozone in serious danger of enduring a further gross domestic product decline in the first quarter of 2012 at least, and with business confidence still generally weak despite largely coming off recent lows, the likelihood is that the eurozone unemployment rate will move significantly higher," he said.

He predicted that the rate would reach 11 per cent later this year, with companies under pressure to contain labor costs. Similarly, Ben May, European economist at Capital Economics, described the latest figures as an "unpalatable combination".He pointed out that there were "firmer signs" of unemployment rising in the core countries of the eurozone, with month on month increases in Germany, France and the Netherlands. "All this, coupled with the prospect of continued fiscal austerity across large swathes of the region and still subdued consumer sentiment, suggests that further falls in eurozone household spending are likely this year," he said.The relationship between inflation and unemployment has been a central topic in macroeconomics.

For some time, it was believed that there was a trade-off between the two variables since the investigation of Alban William Phillips (1958), who documented a negative correlation in U. K. data, which has been named as “The Phillips curve”. Since then, his approach has been considered as base, because a similar relationship between the inflation rate and unemployment rate shown in “The Phillips curve” exists over specific sample periods and even cyclical periods have been identified that policymakers could exploit.It is true to say that the unemployment rate and the inflation rate play important roles in determining the financial situation during an economic downturn. Inflation is caused by the alterations in the supply of money, which has the effects of inflation include loss in the real value of money and other monetary items over time.

And the demand for labor is determined by the price of the company’s output and the productivity of the workers. When unemployment rate is low, the demand for labors increase and the workers are put in the position of commanding higher wages.When wages go up, businesses need to cover the additional cost of their workers, and this creates an increase in prices. A rise in income will create increased purchasing power. Thus, the demand remains high as it reaches a point where the supply can no longer meet the demand, inflation occurs.

However, at the same time, when unemployment is high, workers are unable to ask for better wages. This means that prices can fall, since businesses are not having to pay their employees better wages. Therefore, in many cases, when there is low unemployment, there is high inflation and vice versa.It has been observed that there was a stable and inverse relationship between rate of inflation and the rate of unemployment in an economy. In other words, a lower unemployment rate could be had by tolerating a higher rate of inflation. However, since the simultaneous occurrence of high inflation and high unemployment in the United States and other countries during the 1970s, there has been general agreement that this econometric relationship is unstable.

Indeed, the instability has been so great that Lucas and Sargent characterized it as "econometric failure on a grand scale. (1)As is known to all, widespread joblessness in Greece and Spain pushed the unemployment rate in the eurozone to the worst level since 1999. Coupled with the pitched unemployment rate, the economy has suffered from fluctuation. Take the example of the news released in recent time, which is concerned with the financial situation in Eurozone.

As what we can see in the news report, during the business cycle recession, unemployment increases to 10. 7% which leads to 24. 3 million people without a job, while inflation rate tends to go up, as well, from 2. 6% to 2.

7%.As can be seen from the report, the figures correspond to the unemployment rate and inflation rate change to the positive trend. That means, in some cases, the instability exists in the relation between these variables. Inflation is affected by macroeconomic policy, that is to say, inflation is based on the economy. Also, macroeconomic determinants of labor supply. More and more workers in Eurozone are getting laid off, that is, being fired, over business profits not making what they should be making, and the business suffering, to the point where customers/clients are lost.

Money is an essential part of being. Without it, businesses can't run properly, and cutting costs becomes a necessity, whereby they have to fire workers, and keep the ones that are valuable to the growth of the company. At the same time, just as what the news report says “inflation would fall had been ‘scuppered’ by high oil prices”, high oil prices begins to factor into the economic equation, the rising inflation quickly passes the rate of unemployment.This occurrence of higher inflation rate and higher unemployment rate was seen when the economy s in recession. Therefore, the “double whammy of bad news” eventually may cause the Eurozone to enter into a recession -- and, in some cases, it can actually lead to an economic depression.

But as the April comes, it is reported that the inflation rate of eurozone has been gradually falling down. It has been proved that the Phillips curve can not be widely held, at least as regards the long run. Also the relationship between inflation rate and unemployment rate may not be permanent and stable, and it may transition to another state.In terms of the Phillips curve, classical economists held that there is a natural rate of unemployment, which may also be called the equilibrium level of unemployment in a particular economy. It has been observed by the economists that in the long run the concepts of unemployment and inflation are not related. Also, some economists held the view that the trade-off along the Phillips curve was based on the fact that an unexpected increase in the rate of inflation would, temporarily, reduce the rate of increase in real wages and contribute to a decrease in the unemployment rate.

Even many propositions are made by economists regarding the relationship, King, Robert G. , who displayed econometric instability in three alternative and complementary ways. He showed that the correlation between the inflation rate and unemployment rate has changed in an important way since World War II, and the correlation is essentially zero over the entire 1954-94 period, which summarizes some results that document various dimensions of this instability.Then it comes to the popular and key conception of the idea--a non-accelerating inflation rate of unemployment (NAIRU) It can be considered as a stable relationship between the unemployment rate and the inflation rate for an economy in a long duration. It is the key concept in macroeconomic policy: the rate of unemployment at which there is neither upward pressure on inflation nor downward pressure on inflation.

In major macroeconomic models, the inflation-unemployment relationship is governed in large part by the econometrics of the "price equation" or "wage-price block," which specifies that the inflation rate is a negative function of the level of unemployment. Typically, these specifications imply that there is a rate of unemployment at which inflation is stable--a non-accelerating inflation rate of unemployment (NAIRU), or "natural" rate of unemployment. Much more can be discussed on the relationship between the inflation rate and the unemployment rate.In this article I have investigated the relationship between the unemployment rate and the inflation rate. Both the stable and unstable characteristics of the relationship I have analyzed by use of the news report.

The correlation between the two series over the business cycle is remarkably stable in a short duration, but there appears to be no stable relationship over long horizons. It was discovered that while the unemployment-inflation correlation appeared to be stable over the course of a business cycle, their long-term correlation was unstable.