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

Try It

Using the model of a job search (see Figure 16.11 "A Model of a Job Search"), show graphically how each of the following would be likely to affect the duration of an unemployed worker's job search and thus the unemployment rate:

  1. A new program provides that workers who have lost their jobs will receive unemployment compensation from the government equal to the pay they were earning when they lost their jobs, and that this compensation will continue for at least five years.
  2. Unemployment compensation is provided, but it falls by 20% each month a person is out of work.
  3. Access to the Internet becomes much more widely available and is used by firms looking for workers and by workers seeking jobs.