Inflation and Unemployment

I started my blogging journey reading about what unemployment is and how it is calculated.  I learned that fluctuations happen a lot in employment and unemployment each month due to basic factors such as people losing a job, going back to school or deciding to stay home and raise children.  I also learned that unemployment is more than just a figure, but fluctuations in businesses opening and closing, and the economy itself can cause unemployment or employment.  What I mean by that is sometimes with a good economy, people want to work in order to make good money, while on the other hand people may try to go back to school to learn new skills if the economy is bad and visa versa.  In any healthy economy there will be some sort of unemployment.  There will always be businesses failing, people losing their jobs, technology becoming obsolete thus making people learn new skills or people that tell their boss to—well I won’t finish that.

In The Little Book of Economics: How the economy works in the real world, by author Greg Ip explains “…unemployment won’t drop below a natural rate.”  Which led me to ask: What is the natural rate and how can he say it won’t?  It seems that he is talking about the unemployment rate dropping below the nonaccelerating inflation rate of unemployment or NAIRU.  It is pretty much a point at which inflation and unemployment rate are at equilibrium.  If unemployment drops to a certain level employees will start getting paid more due to the lack of qualified workers which will cause inflation.   Of course there are a lot more factors to the economy than just unemployment and inflation, which led me to more questions because of the lower unemployment rate in ND.  Are people getting paid more than average?  If they are getting paid more, is this causing inflation? What is the perfect NAIRU level?  Terry McCrann from the Herald Sun (Melbourne) explained perfectly in his article In Search of the elusive NAIRU why there is no perfect NAIRU. He proclaimed: “Bottom line there’s no point trying to ‘find’ the NAIRU.” In which I agree, because it seems to be more of a fictitious creature than a real thing.  There won’t ever be a perfect NAIRU, because the economy has proven in the past that what we think is the perfect rate of unemployment and inflation could turn into other things.  Or in my case more questions.

 

Inflation Explained posted on YouTube by jusahah on Apr 7, 2007