Short-Run and Long-Run Relationship between Unemployment and Inflation (Essay Sample)

The Short-Run and Long-Run Relationship between Unemployment and Inflation
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The Short-Run and Long-Run Relationship between Unemployment and Inflation
In today’s economic world, inflation is a commonly used term as it has had diverse impacts on the economies of many states. Banks and financial organizations aspire to understand inflation and the economy's financial condition. Aspiring politicians and leaders have made promises to combat inflation. However, they still fail to get viable and long-lasting solutions to it, and it has since been declared an enemy of economic progress in many states. This brings us to our discussion of what inflation is and its relationship with unemployment. Inflation is the rate at which prices or cost of living in a country rise over a certain duration. This applies to basic goods and services such as food and professional services. Due to the inverse relationship between unemployment and inflation, the cost of living for many individuals is determined by the cost of a variety of basic commodities and services, and getting these goods and services has been negatively influenced by high unemployment and inflation rate, therefore assessing the inverse relationship and getting viable solutions is vital for economic progress and development.
The historical relationship between unemployment and inflation
Government agencies have been known to undertake domestic and community surveys to determine various commonly purchased items and follow up on their costs over time. The ability of households to afford these commodities is based on whether they have an income-generating factor. Findings from the A.W Phillips curve demonstrate a reversed relationship between inflation and unemployment rates (Trehan, 2020). Whenever unemployment is high, inflation becomes low and vice versa. Whenever the rate of unemployment is low, people have money to spend on things they need and wish to have; thus, demand for those items increases and their prices rise, resulting in high inflation. People may tend to purchase less when there are high levels of unemployment, reducing the demand for the goods and services, which lowers their prices and lowers inflation levels.
There are similarities between the Phillips curve and aggregate demand, the collective rate of demand for an economy’s final goods and services at a particular point and price. Changes in this demand results in a movement along the Philip curve, in that a rise in aggregate demand translates to an upward movement along the Phillip curve and vice versa. Therefore, an increase in aggregate demand increases real GDP and prices of goods and services, resulting in low unemployment rates and an increase in inflation. However, there are times when unemployment and inflation have a positive correlation. This is called stagflation, brought about by high inflation and unemployment rates, and is characterized by slow and sluggish economic growth. This can result from changes in economic policies that have an impact on the production of goods and services.
The contrast between the short-run and the long-run in a macroeconomic
Short-run macroeconomics analysis
Sometimes within the economic conditions, there is a time period when wages and other prices do not adjust to changes. This is defined as the short-run, a period with the stickiness of wages. The relationship between output and the level of prices is represented graphically by the short-run aggregate supply (SRAS) curve. The capital stock, technology level, stock of natural resources, and the prices of components of production stay constant while using the SRAS curve. With all other influences remaining constant, a rise in the cost of inherent raw materials or any other factor of production amplifies the production cost and reduces short-run aggregate supply, while a fall would cut the production cost. This would let the economy's stock of resources be used more efficiently used and utilized.
Long-run macroeconomics analysis
The long-run in macroeconomics is an economic period where wages and prices easily adjust and are flexible to the changes within the economic conditions. The long-run aggregate supply(LRAS) curve links the amount of produce by firms to the level of prices in the long run(Simon, 2019). When the net earnings adjust to the point where the labor demanded matches the amount of work supplied, the normal rate of employment is attained. When the economy achieves its natural employment rate, it reaches its maximum production potential.
Contrast
Firms do not have a definite period on their schedules and financial calendar that can be used to distinguish the short run from the long run. The contrast between the two varies by industry. For instance, in a flower production industry, a rise in demand for flowers will have varied impacts in the short run and long run at the firm and economic extent. In the short run, every company in the flower production sector will see the need to expand its labor and resources to cater for the high demand for flowers. Initially, only the firms in operation will be credible to maximize the high demand for flowers as they have the financial and economic capabilities to adapt to such changes. However, the firm's input is irregular in the long run, meaning the existing firms are not limited to capitalizing on building or purchasing factories to meet the increased demand (Simon, 2019). This depicts that new firms are more likely to enter the flower production market and capitalize on the increased demand for flowers.
Long-run macroeconomics shows macroeconomics after achievement and attainment of full market adjustment, while in the short-run, wage stickiness hinders complete adjustment of the firms. In the long run, prices have time to adjust to changes within the industry, and firms are at liberty to enter or leave the market, while in the short run, prices and wages are sometimes out of balance due to changes that the firms may not have the capacity to respond to. Also, in the short run, a rise in the money supply may contribute to a short-term spike in real output since laborers get motivated by the increase in wages, while in the long run, a rise in money supply can cause inflation.
Assessing the recent 20-year U.S. Unemployment and inflation data and whether it confirms the short-run Phillips curve.
Unemployment and inflation rates in the U.S. are determinants of national success and economic progress. The unemployment rate for the recent 20 years in the United States was 3.40% as of March of 2021, while the inflation rate stands at 4.7%, according to the United States Federal Reserve (Forbes, Gagnon,  & Collins, 2021). Researchers argue that long-term unemployment could be caused by a lack of demand. If there is a large negative production gap, increased aggregate demand could lower unemployment and a slight rise in inflation.
According to the Philips curve, the amount of joblessness and the rate of inflation are inversely related in the short run. This is represented by a trade-off between the extent of inflation and unemployment. Trade-offs mean a weighing of aspects that cannot all be achieved simultaneously. Trade-offs are not evident in the long run. When inflation rises, unemployment rises as well due to the need for greater pay (Trehan, 2020). There is no wage or inflation pressure at this time. As a result, increasing aggregate demand to reduce unemployment will only result in inflation and increased unemployment in the long run. Focusing on the recent 20 years of U.S. employment and inflation and analysis of Philip's long-run and short-run curve, it can be concluded that the data evident is long-run data, which disapproves the short-run Philips curve.
Recent 20-year U.S. unemployment and inflation data and whether it approves or disapproves of the short-run Philip curve
From the above analysis, the recent 20-years data disapproves the short-run Philips curve. From the standpoint of macroeconomics, this disapproval was appropriate in the 1960s, when the Philips curve came to prominence and brought out the real world of macroeconomics. The recent 20-year U.S. unemployment and inflation data disapprove of the short-run Philip curve due to a rise in aggregate demand that causes an increase in output. Reduction in unemployment reflects in rising the production, and when people are working, the economy tends to spend more money. Demand-pull inflation, which is inflation brought by increased demand, occurs, making the costs of commodities rise. However, this is more evident in the short run than in the long run, as revealed by current U.S. data on inflation and unemployment.
Data from these recent years have shown the possibility of flattening the Philip curve. When unemployment was going lower, inflation was often rising higher, and when unemployment was going higher, inflation was typically trending lower. However, in recent decades, the relationship between the two variables appears to be less evident, a situation researchers called the onset of the death of the Philip curve (Costain, Nakov, & Petit, 2021). In the last 20 years, researchers have been considerably more conscious of the need to regulate inflation, making inflation in the United States lower. As a result, there is less connection between labor market performance and inflation.
Evaluation of whether the Philips curve can resolve today’s issues of unemployment and inflation.
Several economists and researchers approve Philip's curve metric that there is a trade-off between unemployment...