Topic 18: Unemployment - Economic Effects of Unemployment

Saturday, December 01, 2012

The Phillips’ Curve 

The Phillips’ Curve is a relationship between unemployment and inflation discovered by Professor A.W. Phillips. The relationship is based on observations he made of unemployment and changes in wage levels from 1861 to 1957. He found that there was a trade-off between unemployment and inflation, so that any attempt by governments to reduce unemployment was likely to lead to increased inflation. The curve sloped down from left to right and seemed to offer policymakers a simple choice - you have to accept inflation or unemployment. You can't lower both.

In short the lower the inflation, the higher the unemployment and vice versa. 

Advantages of Lower Unemployment

Full-employment is associated with various advantages.
  • It reduces government spending on unemployment benefits
  • It increases government revenue from income tax
  • It reduces social cost and crimes
  • It increases economic output and improves living standard

Disadvantages of Higher Unemployment

Higher unemployment is associated with various drawbacks. 
  • It increases government spending on unemployment benefits
  • It reduces government revenue from income tax
  • It reduces economic output and reduces living standard
  • It increases social cost and crimes
  • It leads to loss of skills of labour
  • It leads to loss of morale
  • It leads to lost output
  • It leads to poverty

Employment Strategies
  • Provide training and retraining
  • Establish job centers
  • Develop declining industries and regions
  • Reduce income tax to encourage existing workers
  • Establish a Minimum wage to encourage new workers
  • Give production subsidies to producers to encourage taking new workers 
  • Reduce interest rates to encourage borrowing and investment
  • Increase government spending
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