1. Inflation and Unemployment
A2 Economics

2. Content
• The causes and consequences of unemployment
• The natural rate of unemployment hypothesis
• The phillips curve
• The causes and consequences of inflation

3. Unemployment
• There are a number of types of unemployment:
– Structural unemployment
– Cyclical unemployment
– Frictional unemployment
• Structural unemployment occurs when the economy
changes and industries die out
• Training is needed to give the unemployed workers
new skills

4. Unemployment
• Cyclical unemployment is caused by the business
cycle
• Frictional unemployment is caused when people
are temporarily out of work as they are moving jobs

5. Unemployment and PPF
• Unemployment means that
scarce economic
resources are being
wasted reducing the long
run potential of the
economy
• Where there are high
levels of unemployment an
economy will be operating
inside the perimeters of its
PPF

6. Unemployment and AD / AS
• As Aggregate demand increases unemployment will
decrease
• Supply side policies can be used to increase
aggregate supply in the economy and thereby
reduce the level of unemployment
• However if the growth in the level of aggregate
demand is less than the underlying trend growth in
output unemployment is likely to occur

7. Causes and Consequences of
Unemployment
• Unemployment is caused by demand and supply
side factors
• On the demand side if the demand curve shifts
inwards unemployment will rise
• Supply side factors such as an excess of supply of
workers also means unemployment will increase

8. Policies that increase labour market
flexibility
• A number of policies can be implemented to
increase market flexibility and reduce
unemployment
• Policies can be implemented on the supply side and
the demand side by the government

9. Supply side policies
• Supply side policies include:
• Reducing the occupational mobility of labour – this
can be through providing training for the
unemployed, increasing the availability and quality
of education and providing incentives for people to
work

10. Demand side policies
• Employment subsidies can be used by the
government to encourage businesses to give jobs
to the long term unemployed

11. Effects of Unemployment
• On an individual level unemployment reduces the level of income that
an individual earns
• As their income has been reduced consumption also reduces as they
pay for necessities rather than luxuries
• Goods that are income elastic will be consumed less
• Quality of life will be reduced for the unemployed worker
• Workers may become discouraged and give up searching for jobs
becoming part of the long term structural unemployment in the UK

12. Effects of Unemployment
• Unemployment can have significance effects on the
performance of the economy as a whole
• The effects are most marked due to long terms
unemployment
• If there is unemployment in the economy resources
are not being used effectively and the economy will
be operating below any points on the PPF curve

13. Economic effects of unemployment
• If unemployment rates are rising their will be a negative
impact on economic growth potential
• Consumption is likely to fall as consumers will have had a
decrease in income levels
• Government spending will increase as the government will
be responsible for benefit payments
• Taxation levels will decrease as less people are in work
and therefore paying taxes

14. Natural Rate of Unemployment Hypothesis
• The natural rate of unemployment recognizes that
there will always be some level of unemployment in
an economy
• At the natural rate all unemployment will be
voluntary
• This is the employment rate when the economy is
operating at full employment

15. Determinants of the natural rate
• The natural rate is determined by the interaction of
the demand for labour and the supply of labour
• At the equilibrium wage rate all people who want a
job can get a job
• However at this wage rate their will be some people
who choose not to work

16. Natural rate of unemployment and policy
• If governments want to reduce the natural rate of
unemployment they need to concentrate on supply
side policies
• If the benefits system is relatively high in a country
it will cause less people to want to work

17. Summary
• There are three main types of unemployment:
– Structural
– Cyclical
– Frictional
• Unemployment means that an economy cant operate on its ppf
• As AD increases unemployment decreases
• The natural rate of unemployment recognises there will always be some level of
unemployment in the economy
• The Phillips curve shows an inverse relationship between unemployment and
inflation
• Inflation is a rise in the general level of prices
• There are two causes of inflation:
– Cost push
– Demand pull