INFLATION AND UNEMPLOYMENT

It is a way back research which shows the relation between the unemployment and inflation. The immensely increasing production of the country should always avail opportunities for employment at an escalating rate. Even though, the production falls, there is minimum production that could encapsulate a good no. of people for jobs. There can always be jobs available for people in the developing country like India. But, we have hold good percentage of unemployed in the country. Where goes the fault? The administration reforms of the government which target the unemployment are meagrely sound. The tenacity and lacklustre among the individuals stand as a lay out, for the abundance of the problem.

Inflation is a manipulative art, the scheming methodised by the government. When Phillips found out the critical correlation between the generally key pawns of the economy, it was considered an unending achievement. For, say the unemployment hikes, the people start getting out of jobs implies low earnings implies low standard of living. Withdrawing from the banks to meet their day to day needs implies the demand decreases. Eventually, price decreases. As most of them are not earning, the money flow in the market swoops down resulting in the cut down of inflation. Conclusively, Inflation plunges when unemployment peaks and vice versa. This is simply the Phillips curve theory of 1957.  As far as Phillips considered this theory, it is a long term phenomenon where inflation and unemployment are inversely related.

1970’s was the time when many countries began to experience Stagflation. Stagflation is the outcome of high inflation and high unemployment in the economy. When both the pawns are high, think the country is in devastation. The situation is completely different from recession as there is recession and inflation at the same time. This happens when there is a supply shock. The oil prices increased due to the embargo introduced towards the west. This provoked the already recessed economy of USA in the post war period. The prices started to burst up even when there was no demand due to the increase in the prices of oil, a raw material in many consumer goods (cost push inflation) added to the already existing unemployment. Thus, a high unemployment and inflation were experienced causing stagflation which was completely against the Phillips curve theory.

When there is high money flow in the market, the inflation increases and the unemployment is at its low, as per Phillips curve theory. But there comes a situation where the real wages value stagnates. Though there aren’t any changes in wages, the value associated develops a swoop resulting in the trade union up rise seeking for more wages. Increase in wages continues for a while and takes a break as it could not be able to meet the pace of inflation. This encourages people to quit their jobs and gradually unemployment increases. Here is again the unemployment and inflation escalating.

The decade of 1970 has given us to understand the stagflation and prove the Phillips curve theory wrong in the long term. The government can manipulate unemployment rate in order to fluctuate inflation but it can happen only in the short run. There is always a close connection between any two important pawns of the Indian economy.