Concepts of Economy and Inflation

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Name: Adonis Cabrera
Class: ECO-201
School: Borough of Manhattan Community College
Date: 11/20/2021

Table of Contents

Concepts: Unemployment and Inflation
Unemployment – Various Forms
Inflation – Cause and Effect
Phillips Hypothesis
Application & Analysis
Testing of Phillips Hypothesis: Data and Analysis (USA)
Comparing Return on Capital (US) & (Germany)


Have you ever wondered what makes the economy fluctuate ? What creates a recession of economic instability or an overabundance of economic activity? Well good, because in this article I will be going into detail on several topics. Including but not limited to: Unemployment and Inflation, The Natural Rate of Unemployment, Core Inflations, Import and exportation etc.

In regard to economic activity I will detail economic input and output based on The Supply Demand Curve. I will also summarize The Phillips Curve Hypothesis, utilizing an article written by Ramaa Vasudevan. Demonstrating an analytical perspective based on graphs and numerical data. My supporting information on Unemployment and Inflationary data will be provided on the US economy. I will analyze the relationship that is present between the two variables for the periods 1947-2020, 1947-1959, 1960-1979, 1980-1999, 2000-2010 and 2011-2021. My goal is to demonstrate the fluctuations and regressions of the economy. I will argue for The Phillips Curve while also providing contradicting themes to evade from a biased stance on the subject.

Unemployment and Inflation

Unemployment is by definition the state of not having a job or occupation; while also
being actively involved in looking for work. Those who are not employed, while also not looking for a job are considered “out of the workforce”. These groups may include: Students, Disabled Persons and Retirees. These groups are left out of the unemployment rate.
The different forms of Unemployment are: Frictional Unemployment, Seasonal Unemployment, Cyclical Unemployment, Structural Unemployment, Technological Unemployment, and Disguised Unemployment.

Frictional Unemployment: results  from a reduced adjustment between demand for and supply of labor. This may be caused by an unsubstantiated amount of knowledge on behalf of employers, about the availability of workers or on the part of workers that employment is available at a particular place.
Seasonal Unemployment: occurs from fluctuations in the demand for workers that occur over a seasonal pattern. This may include agricultural harvest workers in September or factory workers from October-December. Temporary agencies often hire seasonal workers to fill in the demand for production. Cyclical unemployment begins due to cyclical variations within the economy. This may also be constructed on a multinational scale. A business cycle consists of alternating events of surges and depressive economic activity. It is during the downturn of the business cycle that earnings and production fall creating a wave of widespread unemployment.
Structural Unemployment: is a category exclusively based on a shortage of workers who have the skills to fill in positions for the labor available. Although workers may be available, they may not have the training to perform and fulfill the task being asked of them in the open positions.
Technological Unemployment: resulting in part by technological advancements. Which take away the necessity of using human labor. This may cause firms to produce a shortage of staff due to robotic, computerized or machine like production. That is vastly superior to human work, while also being less cost effective.
Disguised Unemployment: is a feature where laborers take on jobs that are low paying and often illegitimate in order to make ends meet. This is often witnessed in third world countries where workers must take to involuntary labor in order to receive some form of income. A great example would be “Sweatshops” in Asia, Mineral mining in India, as well as coal mining in Africa. Due to the illegitimacy of the job it is considered unemployment, because it is disguised as employment. But the impoverished workers have no legal standing in the companies and are therefore unemployed.


What is inflation? How does inflation occur?

Inflation is the rate of rising prices of goods and services, inflation occurs when prices of raw materials and cost of labor surge causing businesses to raise prices for products in order to make profit, the effect trickles down to consumers who therefore pay more for such products and services; the effect has been coined “Cost-Push Inflation”. When prices rise, so do paid wages in order to upkeep the livelihood of workers; this effect places a burden on firms and increases cost of production which again increases price of goods. This is considered to be “Built-In Inflation”. Built-In Inflation can also occur if the natural unemployment rate drops below 3%, a surge of employment conveys a stronger desire to have increased wages among workers which can also raise the price of production and cause an overall impact of Inflation on the economy.
Inflation can affect a society by lowering the value of the buying power. When the debt of a nation increases more money is printed to stop an economic downfall. The newly printed money is an IOU. Which causes the value of that currency to have less weight in the Exchange Rate.
The loser’s during an increase of inflation are generally seen as the proletariat, non-unionized workers who demand more wages. The winners in an inflation are usually the rich and affluent. Who can use inflation to their advantage, by purchasing more for a price lower than was previously issued. Inflation can be used to subdue a potential deflation, because inflation causes an upstart in economic activity. Increasing consumer purchasing of goods and services. From the years of 1960-2020 inflation has risen 6.2% in the U.S. The Consumer Price Index (CPI) has risen 276.72 points. This demonstrates the economic regression that has been caused due to inflation.

Phillips Hypothesis

No one has made a bigger fundamental impact on Microeconomic policy such as Alban William Housego ‘Bill’ Phillips’. Bill reviewed wage inflation and unemployment data for the United Kingdom from 1861-1957. The idea caught the attention of American Keynesians who did not have a concrete idea on how to manipulate the economy. Their view was defined by using government control; and through fiscal policy, government spending by lowering taxes and using social welfare programs such as unemployment. Would then subsequently increase consumer demand and thus create economic activity.
The Phillips curve proves that there is a trade-off between unemployment and inflation. If unemployment is at 0% there is an achieved equilibrium where the supply chain meets the consumer demand. The underlying issue with Keynesian economics seems to be the Inflation of the Exchange Rate due to the burden of over expenditure on behalf of the government in providing for social welfare programs. The Phillips Curve is a theory that as unemployment falls and fewer positions are available. Workers will then demand to have higher pay for their services.

The natural rate of unemployment is considered the least amount of unemployment. Stemming in part by real and voluntary economic force. Natural unemployment may reflect the nominal amount of people that are unemployed due to the structure of the labor force, such as those replaced by technological or certain skills to gain employment. The essential percentage of natural unemployment should be around 4-5% in order to maintain stability.

The counter argument is Stagflation which asserts that if unemployment drops below its “Natural Unemployment level” this will cause inflation. Meaning that any pay increase that workers may obtain will no longer have as much value as previously earned, due to the monetary loss of value caused by inflation. The “Gold-lock State” may be referred to as Ceteris Paribus, where the economy’s unemployment rate is kept at an equilibrium. In the same case; to blockade a further progression of inflation. Natural unemployment cannot regress under 3% in order to maintain the equilibrium.

During the 1980’s Ronald Reagan’s economy was nicknamed “Reaganomics”. Due to his economic concepts of reduced government expenditure, reduced taxation, relaxed regulations and a cap on the money supply to reduce inflation. During his tenure from 1981-1989; The Annual Change in The Gross Domestic Product (GDP) grew by +3.67%, The Real GDP per household being $5,641.58 and the Income per Capita was $22,857. (See The Graph Below)

(Reaganomics Period 1981-1989)

The Phillips Curve may not always show accurate results due to other economic factors that may drive inflation other than unemployment. For example, if a country is in full employment, factors such as government borrowing may turn into a deficit that may take the working class years to overturn. This effect as well as consumers spending their money abroad as was done in the 1970’s creates an Imbalance of Trade (BOT), that is the reason behind why the Phillips Curve fell in the 1970’s due partly by the higher frequency of importations rather than exportations. When domestic productions surge and consumers use their buying power to keep the monetary circulation within the country while also expanding higher exportations than importations. The real GDP has a substantial growth.

This has been seen a few times, particularly with Germany. As The Phillips Curve states when unemployment falls to at least 3%, economic activity starts to boost. As Germany became subdued in debt due to expenses of World War One and having to pay for all of the reparations of the war under The Treaty of Versailles. Germany Became one of the poorest countries in Europe. But as The National Socialist Party began to rise into power and gain government control, Germany began to neglect importations and used substitutions for all foreign products, these substitutions were made domestically and thus creating a workforce of manufacturing goods for domestic use. Keeping unemployment rates low and satisfying the supply-demand chain created an economic surplus for Germany which would place the country in a position that was ready for war by mid 1939. The graph below demonstrates the economic activity.

As seen above, in 1931 there was a massive unemployment in Germany. But by 1932-1933 When Adolf Hitler assumed the position of Chancellor , The economic activity sky-rocketed, the graph can be defined as left-skewed from the periods of 1933-1940; The Return on Capitol Rose by 20%. The chart has an inward curve due to the Nazi Party using the economic gains to wage war, which inadvertently decreases capitol gains as well as economic activity. The Reason Behind FDR’s restraint and lack of interest in pursuing a European war came out of American interest due to the already declining Capital. A war simply was in the best American interest; it would only further regress economic activity.

During The Clinton Administration well over into the 1990’s the economy was kept in a Gold-Lock state. This is shown to be one of the best economic advances the U.S has ever seen! Beside President Jimmy Carter. The Annual Change from 1993-2000, grew by 4.13% year over year. The Gross Domestic Product Per Year was $10,581.82 and The U.S Per Capita being $37,133. Bill Clinton achieved what some duped “The Goldilocks” state by pushing for reformation on the wealthy and increasing taxes among those with higher than average incomes, while also constraining government spending. This in return allowed the economy to flourish due to less of a government presence. (Clinton Admin. 1993-2001)

In contrast to Reagan’s policy which asserted that capitalists who already earned more than the average American were entitled to tax write-offs, less taxes on capital gains and overall less taxation by The IRS.

“The 1982 Economic Report of the President argued strongly that”
“there was no long-run inverse relationship, that the Phillips Curve was
a short-run phenomenon and that in the long run, any effort to trade
off lower unemployment for higher inflation would lead to a situation
of higher inflation without permanently lowering unemployment. The
evidence was presented in a diagram showing that the relatively stable looking trade-off of the Phillips Curve in the 1950s and 1960s had disappeared in the 1970s. The council argued,”

“The irony of the 1970s was that the attempt to trade inflation for
employment resulted in more inflation and rising unemployment. . . .
the lesson to be learned from the experience of the United States since
World War II is that high rates of unemployment can coexist with
either high or low inflation. There is no reason to expect a systematic
association between the average unemployment rate and the average
rate of price-level change, and none is found in the data when one
considers periods of several years or longer” – Excerpt From (Surrender: How the Clinton Administration Completed the Reagan Revolution)


In order to finalize and conclude the information provided. It is fair and safe to say that bargaining unemployment for inflation is not conclusive in the long-run. Meaning that although The Phillips Curve may be used as a precursor for economic policy, it may be beneficial for only a short period of time. As many other factors may contribute to inflation that fall out of the externalities of employment. In return the Phillips curve is a vital essence to Microeconomics because it promotes and enforces The NAIRU. In my strong belief; The only way to achieve economic stability and equilibrium is by maintaining the Natural State of Unemployment, limiting borrowing and government expenses, raising taxes for those who earn more than the average American and providing social welfare programs that incentivize economic activity.

A strong economy is kept in equilibrium by exporting more than is imported. Maintaining a strong workforce. That can produce the supplies needed to meet the demands of consumers that are vastly infinite, while also maintaining a high availability of domestic products. In order to eliminate the effects of scarcity, which further weaken the economic welfare of the state. By allowing households to have sufficient disposable income that has a stronger monetary power than the goods or services being obtained this also helps vitalize and solidify good economic activity.

Citations: Leeson, R. (1997). A. W Leeson, R. (1997). A. W. H. Phillips. In T . H. Phillips. In T. Cate (E . Cate (Ed), G. C. Harcourt, & D. C. Colander) (Assoc E . C. Colander (Assoc Eds). An Encyclopedia of Keynesian
economics. Cheltenham, United Kingdom, Brookfield, Vt: Edward Elgar.