Inflation and Unemployment

Read this chapter to examine the relationship between inflation and unemployment. As you will see, while there have been some periods in which a trade-off exists between inflation and unemployment, there are also periods in which such clear-cut negative relationship between these variables falls apart. The chapter offers some explanations for these variable behaviors and the stabilization policies that are used to address undesirable trends in the variables.

3. Inflation and Unemployment in the Long Run

Key Takeaways

  • Two factors that can influence the rate of inflation in the long run are the rate of money growth and the rate of economic growth.
  • In the long run, the Phillips curve will be vertical since when output is at potential, the unemployment rate will be the natural rate of unemployment, regardless of the rate of inflation.
  • The rate of frictional unemployment is affected by information costs and by the existence of unemployment compensation.
  • Policies to reduce structural unemployment include the provision of job training and information about labor-market conditions in other regions.
  • Efficiency-wage theory predicts that profit-maximizing firms will maintain the wage level at a rate too high to achieve full employment in the labor market.