Macroeconomics Essay-Unemployment

1133 Words Nov 21st, 2012 5 Pages
3) Compare and contrast alternative views on the nature and possible causes of unemployment and evaluate the effectiveness of demand and supply management policies to combat it
This essay will compare and contrast alternative views on the nature and possible causes of unemployment. It will then go on to evaluate the effectiveness of demand and supply management policies that try and combat unemployment. I will be discussing unemployment in two parts- short run and long run and evaluating the effectiveness of demand and supply management policies that combat unemployment for each.
First of all, ‘the unemployment rate measures the fraction of the workforce that is out of work and looking for a job or expecting to recall from a layoff’.
…show more content…
However, the short term Phillips curve is flat. For example, within a year one point of extra unemployment reduces inflation by only about a half of a point in inflation. This only leads to a conclusion that something is missing from the Phillips curve, that’s why it fell apart in 1960s.
The missing point from the curve was expected inflation. When bargaining over wages, we are concerned with the real value of the wage, so we and employers are willing to adjust the level of the nominal wage for any inflation expected. Unemployment, therefore, depends on the excess of inflation over what was expected. For example, if you get a wage increase of 4%, even though it is not a lot you will still be pleased. Now imagine if you, as a worker get told that inflation has been running at 15% a year and is expected to stay at this rate. This means that your living standard is actually going to fall by 11%, so therefore you care about wage increases in excess of expected inflation. Having added this new factor, the Phillips curve changes into the (inflation-)expectations –augmented Phillips curve which can be represented as , where π and πe are inflation and expected inflation respectively, b is a positive constant, U is unemployment, and Un is the natural rate of unemployment.

* http://economicsonline.co.uk/Managing_the_economy/Unemployment_types_and_causes.html * From the recent figures, The Office for National Statistics

Related Documents