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.
China is facing a new economic crisis, and it is not about mounting local debt or even a rapidly slowing property market. The crisis in the making is about family business succession in the world’s second-largest economy. This issue may seem innocuous for many observers, but it is in fact one of the many pressing issues for the country’s economy, which is undergoing a painful process of rebalancing. Why is the family succession issue so important?
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.
Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago. IMF’s Chief Economist from September 2003 to January 2007. Inaugural recipient of the Fischer Black Prize.
Vice President and Director of the Global Economy and Development Program at the Brookings Institution. Former Turkish Minister of State for Economic Affairs. Head of the United Nations Development Program (UNDP) from 2005-2009.
James W. Harpel Professor of Capital Formation and Growth at the John F. Kennedy School of Government in Harvard University. Director of Program in International Finance and Macroeconomics at the National Bureau of Economic Research.