|
Related Topics
|
Category: Unemployment and Covid-19
Date: 20 April 2020 We take a look at the USA unemployment rate and compare it to the USA's inflation rate. Why you ask? A. W Phillips developed what is known as the Phillips curve and what is states that with economic growth comes inflation but lower unemployment, so there is an inverse relationship between unemployment and inflation. Does this hold for the USA?
Note all data obtained from the Bureau of Labor Statistics (BLS) |
Phillips Curve for the USA
We take a look at data obtained from the Bureau of Labor Statistics (BLS) for the USA's inflation rate and unemployment rate from 1948. The scatter plot below shows the average annual inflation rate and the average annual unemployment rate per year from 1948. Inflation on the vertical axis and unemployment on the horizontal axis. The red line shows the trend line. And based on Phillips Curve economic theory the line should slope down from left to right.
But as the graphic above shows the trend line is sloping upwards and not as expected
There could be whole host of reasons as to why the Phillips curve doesn't seem to hold true for the United States. For starters the use of the headline inflation rate (which includes volatile items such as energy prices) could potentially skew the results. As significant increases in energy prices leads to higher inflation rates but there might be negative or low growth in the economy with little to no change in unemployment rates.
Another possible explanation is the advent of technology with greater automation in industrial and manufacturing processes, significant economic growth took place yet unemployment might have increased or remained the same due to machines replacing people while output and productivity grew.
While simplistic economic theories such as Phillips is useful to try and understand relationships between different economic variables the fact is modern day economies are so complex one would be hard pressed to find simple relationships such as these to hold true when there are so many different variables that play a part in modern day economies.
Another possible explanation is the advent of technology with greater automation in industrial and manufacturing processes, significant economic growth took place yet unemployment might have increased or remained the same due to machines replacing people while output and productivity grew.
While simplistic economic theories such as Phillips is useful to try and understand relationships between different economic variables the fact is modern day economies are so complex one would be hard pressed to find simple relationships such as these to hold true when there are so many different variables that play a part in modern day economies.