| What is the Natural Rate of Unemployment? (NRU)
-Why does this exist? | -This is the Rate of Unemployment when the Labour Market is in Equilibrium. This essentially means there is Enough Jobs for Every Worker in the Labour Force, but NOT that every Worker will be in a Job
-This is because of Frictional and Structural Unemployment |
| What does the Short Run Phillips Curve show? | -This shows a Trade-Off between Inflation and Unemployment, as A.W Phillips had found when plotting Historical Inflation and Unemployment Rates
-If the government wanted to Reduce Unemployment, it could Increase AD and accept Higher Inflation. |
| What do Critics say about the Short Run Phillips Curve?
-Link to Adaptive Exceptions | -Some say it isn't so Simple. As Inflation goes up, people seem for it to Remain High and therefore Change their Behaviour Accordingly
-People thus are using the Past to Predict what will Occur in the Future. If Inflation is High Today, then they'll think it'll be High Tomorrow. Thus High Inflation may be Embedded in an Economy, as the Government is trying to Reduce it |
| Why would Keynesian Economists agree with the Phillips Curve? | -Due to how they perceive the LRAS Curve.
-Below Point A, where Output is Low and Unemployment is High, workers will Take on Jobs even if Wages are Low. Output will Rise and Inflation won't Increase at all
-But between A and B, as you Increase Output and Lower Unemployment, Prices start to rise and rise. This is seen exactly from the Philipps Curve? |
| What is the NAIRU? | -The Non-Accelerating Rate of Unemployment offers the Lowest Rate of Unemployment which can Happen in the Long Run WITHOUT Changes to the Rate of Inflation
-If it is 5%, then Unemployment Below this Level leads to an increase in Inflation, but More Unemployment leads to Deflation
-In the Real World |
| Give a Brief History of Usage of the Philipps Curve | -During the 50s and 60s, the Government used the Curve to Manage the Trade-Offs between Inflation and Unemployment
-During the 70s, the Relationship began to Break down, as Stagflation occurred (Low Growth, High Unemployment, High Inflation)
-Monetarists Economists thus stated that the Short Run Philipps Curve only considered the Current Rate of Inflation, and not the Expected Rate of Inflation (Adaptive Expectations)
-Thus was born the Long Run Philipps Curve |
| Why can Inflation being Embedded affect the Philipps Curve? | -Let's say we begin at Point A, where Unemployment is at its Natural Rate. This is the NRU
-Inflation is at 0% here, and Economic Agents will Expect Inflation to stay the same, as it Influences Workers Wage, and Consumers Expenditure
-If AD Rises, and Unemployment goes Below the NRU, then Wage Demands will Increase and Inflation will therefore Rise - say 3%
-Because Economic Agents think Inflation will stay at 3%, Economic Agents will use that to Influence their Decision-making (Wage Negotiation)
-As Wage Demands become Greater, Firms will be Less Willing to take Workers so Unemployment will Rise back to the NRU. Despite Unemployment Returning back, the Inflation Rate of 3% is now Embedded in the economy. Higher AD only leads to Further Embodiments of Inflation in the Economy |
| What does the Long Run Phillips Curve do for the Bank of England and the Government? | -Governments need to use Policies that Stop Inflation from Continuously Rising
-Bank of England is Tasked with Keeping Inflation at 2% for Consumers Expectations to be kept at 2%. Furthermore, the Government will try to Lower Unemployment and Lower the NRU |
| Why does the Long Run Philipps Curve say there is No Trade Off Between Inflation and Unemployment
-What is said about the Significance of the Philipps Curve? | -Monetarists says that the Long Term Effect on Unemployment was Non-Existent. It always returns to the NRU
-Therefore, they argued there was No Long-Term Link between Inflation and Unemployment
-Some Economists argued the Short Run Philipps Curve doesn't even exist at all - the Trade-Off doesn't Exist!
-Supply Side Policies can Lower Unemployment and Lower Inflation, which again, goes Completely Against the Philipps Curve. Sometimes though there can be a Trade-Off Existing, so the Philipps Curve is seen in usually Short Run Economic Policy Making |
| When dealing with Unemployment, why can Demand-Side Policies be ineffective? | -For Example, during a Recession, the level of Cyclical Unemployment will Increase which may prompt Reflationary Fiscal Policies
-This can be bad, if there is a Lack of Information about the Size of a Nation's Output Gap, which may lead to the Economy Overshooting (Proliferating) or not Escaping a Recession
-Furthermore, not enough Information on the Size of the Multiplier means that if it is Bigger than Expected, it may lead to Inflation being much more Likely
-Finally, it can be Clumsy and Create more Problems - the Time Lag can Prevent Improvements from Developing Fast, or Governments may think the Policy isn't working, and they'll keep on Spending |
| How can Governments reduce the NRU? | -Governments use Supply-Side Policies that allows a more Flexible, and has less Frictional and Structural Unemployment |
| What are the 3 Major Factors of the Flexibility of Labour | -Labour Mobility: How easy it is for Workers to switch Jobs. More Transferrable Skills can make it more Easier. So this is about how Skilled Workers are, and also the Willingness of Workers to move where Jobs are located
-Wage Flexibility: Are Wages able to Change with Changes to the Labour Market (Supply and Demand Changes) In a Recession, Employers could Lower Wages instead of Sacking off Workers
-Flexibility of Working Arrangements: Can Employers hire Workers best suit them? Part-time work, Short-Term or Zero Hour Contracts allow it for Firms to to Hire or Fire Workers and Respond to Changes in the Market |
| How can the Flexibility of Labour be Improved? | -Labour Mobility is Tackled by Policies to Reduce Structural Unemployment
-Governments can Scrap the NMW and Limit Trade Union Power for Further Wage Flexibility
-Governments can also pass Legislation to make Firms have Greater Power in dishing Exploitative Contracts (Zero or Short) |
| How can Frictional Unemployment be Reduced? | -In a Nutshell, Policies that Encourages People to Find a Job
-Less Income Tax can Incentivise Work, or for them to work Longer Hours
-Greater Information about Jobs allows Workers to find their Right Job Quicker
-Reducing Benefits will make more Unemployed Workers seek Work, and also deal with the Unemployment Trap |
| How can the Government lower Structural Unemployment? | -Governments may be able to Improve Occupation Mobility by bringing Investments to Training Schemes for Greater Skills, or to Encourage Firms to Train their own Workers
-Geographic Immobility can be Tackled by dishing Subsides to Workers to go to Different Areas of the Economy, or by making Affordable Homes (Social Cost?)
-Jobs that are being brought to Areas with High Unemployment by Governments giving Benefits to Firms in that Area + Training Schemes to boost the Skillset of that local Populace |
