Defining Unemployment

Improve the standard of education – schools (lower class sizes), vocational training, university education, life-long learning. Remove the dependency culture on state benefits. The New Deal introduced in 1988 provided subsidies to help people make the transition from state benefits to employment in the private sector. For those who did not secure jobs, opportunities for education and training or voluntary work on an Environmental Task Force. Sanctions if unemployed people refused to participate.

April 2001 the New Deal extended to the over 25s on a national basis. UK unemployment is low. But problem areas remain. North-East England, Northern Ireland higher rates on average and also concentrated in certain towns or parts of cities. Problem of families where several generations are unemployed. Consequences of Inflation First of all it is necessary to distinguish between anticipated and unanticipated inflation. Anticipated inflation occurs when there are no price changes which are surprises. In contrast, with anticipated inflation, price rises are surprises and cannot be taken account in contracts.

With fully anticipated inflation there are two main costs: ‘shoe leather’ costs and ‘menu’ costs. Given that interest is not paid on cash and on some bank accounts, then the cost to holding cash is the interest foregone. Thus at times of inflation, it is better to leave money in a bank earning interest and that people would make more trips to their bank and hence wear out their ‘shoe-leather’. Menu costs are the costs involved in actually physically changing prices. Examples include the cost of altering vending machines, telephones and cash registers as prices change. Inflation, in so far as it is not anticipated, changes the distribution of income and wealth, which depends on the speed with which different social groups react to it.

Moreover, with the economy booming the bargaining strength of trade unions increases: employers are more willing to concede wage demands.  These possibilities have led economists to postulate – and indeed to measure – the so-called Phillips curve relationship: the lower the level of unemployment, the faster the rate of increase in money wages. But it is dangerous to postulate ‘general laws’ in economics: in the 1970s inflation increase despite high and growing unemployment and governments in most Western countries were confronted with a phenomenon known as stagflation. (stagflation – inflation associated with static or declining output and employment)

The major part played by labour market pressures in generating demand inflation gives rise to perhaps the most familiar relationship in macroeconomics, the inflation-unemployment trade-off. The original Phillips curve captured this relationship by plotting the rate of change of money wages against unemployment in the UK economy over the period 1861-1913. These empirical observations implied a non-linear negative correlation between wage inflation and unemployment. Phillips explained the non-linearity of the relationship, specifically the fact that the curve is steep when the economy is close to full employment but fairly flat when unemployment is high, as the outcome of workers’ resistance to money wage cuts.

Workers are unwilling ‘to offer their services at less than prevailing rates when the demand for labour is low and unemployment is high so that wages fall only very slowly’ (Phillips, 1958, P283). The first development in what was to become the complicated evolution of the Phillips Curve involved the substitution of price inflation for the rate of change of money wages, on the grounds that they are closely correlated. The Phillips Curve was immediately transformed into a map of the options facing macroeconomic policy makers, implying that monetary and fiscal policy measures are likely to be important factors in explaining demand-pull inflation.

An expansion of aggregate demand would move the economy along the Phillips curve in a north-western direction from a to b as policy makers accepted higher demand pull inflation as the cost of reducing unemployment (Figure 3.3) Lower interest rates might be used to encourage borrowing to finance extra consumption and investment, taxes might be cut to stimulate consumption or government expenditure might be increased.

If, on the other hand, the priority was to reduce inflation, higher interest rates or tax increases or cuts in government expenditure would move the economy along the Phillips curve in a south-easterly direction, for example from b back to a. Probably the most spectacular episode of demand pull inflation in recent years was the so-called “Lawson boom”, named after the Chancellor of the Exchequer Nigel Lawson.

In the 1988 budget there were significant income tax cuts. At the time, house prices were rising rapidly, and people felt wealthier and were prepared to borrow more money to increase consumption. However, perhaps the most striking feature of the UK Phillips Curve in the 1970s is that the inflation rate accelerated most rapidly when unemployment was either constant or also rising.