Inflation and unemployment go hand in hand. For every country, maintaining a low unemployment rate is the main objective. It is usually believed that inflation and unemployment are inversely proportional. There are many economists, who hold the opinion that low rate of unemployment together with low inflation rate may be a source of concern. Both low inflation rate and low unemployment rate, may be hypothetical. In real practice, this rarely happens. If a particular country, has full employment, it can be said to have minimum rate of unemployment. If a nation maintains a minimum rate of unemployment in a condition when inflation rate is stable, it is said to follow the natural rate of unemployment. In other words, the natural rate of unemployment is the minimum rate of unemployment, which can be sustained.
Inflation and unemployment- how it works:
If rate of inflation increases suddenly, it temporarily reduces, the rate of increase in the wages. Consequently, unemployment rate decreases. If the workers are able to cope with the increase in inflation, unemployment rate is also less. However, when they do realize that in order to compensate for the increase in price of commodities, the wages ought to be increased, unemployment may rise to a considerable extent. This increase in the demand of wages, has a tendency to reverse the unemployment curve to some extent (unemployment rises). If the rate of inflation is very high, it does not mean that, there will be a permanent decrease in the rate of unemployment. As a rule, rate of inflation and unemployment adjust themselves to attain the equilibrium state, which is known as the natural rate of unemployment state, effortlessly. It just happens.
The Philips Curve:
The Philips Curve, as the name suggests is named after the William Philips, who was a famous economist. He suggested the relationship between inflation and unemployment. The Philips curve shows how inflation and unemployment are related. He suggested that if rate of inflation is high, rate of unemployment is low. On the other hand, if the rate of inflation is low, unemployment rate is high.
Indian economic data in July on industrial growth and inflation was disappointing. Industrial sector growth slowed to 3.4 per cent in June 2014 with the manufacturing sector, the largest component, growing at an anemic 1.8 per cent. But the more worrying set of statistics was the rise in retail inflation to 7.96 per cent in July 2014, which also reversed the declining trend observed since December 2013.
Nouriel Roubini, a.k.a. “Doctor Doom”, is chairman of Roubini Global Economics and professor of economics at New York University’s Stern School of Business. Roubini has been consistently cited as one of the world’s top global thinkers. This year, he was voted as the most influential economist in the world by Forbes magazine.
Professor of Economics & Director of the Earth Institute at Columbia University. Special Adviser to the UN Secretary-General on the Millennium Development Goals. Founder & co-President of the Millennium Promise Alliance.
CEO and co-CIO of PIMCO. Served as President and CEO of the Harvard Management Company for 2 years, while also working at the IMF for 15 years. In 2008, his book "When Markets Collide", won the Financial Times award for Business Book of The Year in addition to being named as the one of the best business books of all time by The Independent.