As seen with the giant economic swings caused by COVID-19 it is very hard for the government to regulate both
inflation and unemployment even having access to complicated macroeconomic models.
When the entire country shut down due to the spread of COVID-19, the economy took a turn for the worse as people stayed home from work and were not spending money on any non-essential items. This impacted industries from entertainment to restaurants to individuals who were laid off due to these impacted industries. The government stepped in with stimulus checks in order to revitalize the economy by giving consumers the resources to buy the products people needed. This increased the amount of money in circulation which in turn helped industries be able to hire more workers. However the government’s stimulus checks focused on providing macroeconomic stability while now we are dealing with the consequences of high inflation.
According to Forbes Advisor, “During the Covid-19 economic crisis’s peak, unemployment rates soared 14.7% in April 2020. But as of July 2022, unemployment stands at 3.5%, the lowest level since February 2020.” Unemployment and inflation are inversely related. As unemployment increases, inflation decreases and vice versa. The government tries to balance out these two negatives. In the past, the Federal Reserve has used the Phillips curve as one of its macroeconomic models to set interest rates. The Phillips curve is a model that describes the relationship between inflation and unemployment and is used by the government in order to stabilize pricing while still maintaining high employment rates. Recently with the surge in inflation, many companies are laying off workers in order to deal with inflation. According to Insider, “Silicon Valley slashed some 100,000 jobs in the past six weeks in repentance for its pandemic-era hiring binge.” This is an example of inflation decreasing but unemployment increasing following the Phillips curve model. According to Investopedia, “When more people are working, they have the power to spend, which leads to an increase in demand. And prices (inflation) soon follow. The opposite is true when unemployment rises.” This shows how as inflation rises and labor becomes more expensive, businesses' margins of profit become slim enough that businesses start to lay off people in order to reduce their expenses and this decreases inflation again following the Phillips curve model.
However, as the economy has changed with income inequality reducing the individual worker’s bargaining power as well as other factors like globalization and the increased efficiency brought by e-commerce, the Phillips curve has become less and less accurate. This has led to it becoming more and more difficult for the government to use fiscal policy to prevent recessions and minimize inflation. This is partly because although businesses now react to future models of inflation predictions, the Phillips curve does not take into account businesses having such advance reactions.
It is clear that the government will have to take more things into account when creating fiscal policy with the intention of stabilizing prices and the labor market.
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8 comments:
I think this is a really interesting issue to discuss, especially as the world is not yet out of the woods with COVID-19 or other forms of bird flu as recently reported in this blog. As it stands, the economy seems to be a bit of a broken record, repeating the same inflation-unemployment dance. Because the sway between the two has gotten so much more pronounced with the pandemic, will the government step in, enacting new policy to protect against layoffs and unemployment, as well as protect companies from the harmful effects of inflation? On the other hand, government involvement in the recent times of economic crisis in the form of stimulus checks and other relief efforts is arguably what worsened the situation in the first place. On some level, the back and forth between inflation and unemployment appears to be inevitable, but that doesn't mean the spikes have to be as dramatic, and harmful, as they've been recently. It seems a bit of an impossible question, but I will be interested to see how the government responds to this new wave of unemployment that looks like it may be fast approaching.
I agree with what Teagan mentioned about the essentially inevitable sway between the two factors – unemployment and inflation – and how new factors and repercussions need to be accounted for when determining ways to control the influx's. We've seen the impact that interest rates have had on the stock market, which investors being wary of possibly increasing changes by the federal government. The topic is very intersting, and has had various impacts on the lives of Americans throughout the pandemic. As people have begun to adjust to the "new normal," I'm curios to see what the new normal is in when it comes to the balance between the two factors.
I think that it is interesting that the Phillips Curve suggests there is a tradeoff between inflation and unemployment. I think that there is a typical misconception that these are often separated factors, so it is cool to see how they may be correlated. It makes sense though, proposing that as unemployment falls, inflation tends to rise, and vice versa. Although the Philips model has undergone criticism and modification over the years, it definitely still has relevance today in macroeconomic analysis and policy-making. Governments and central banks may use the Phillips Curve to guide decisions about monetary and fiscal policy, such as adjusting interest rates or government spending, in an effort to maintain a stable economy with low unemployment and inflation rates. As Maddie pointed out, this is especially true in the current age of COVID.
Similar to what has already been said, I think that the inverse relationship between inflation and unemployment is quite fascinating, but understandable. As mentioned in the quote within the blog, businesses will have to pay more people if there are more workers, and that leads to more spending which leads to more inflation. The concept makes sense, but as mentioned earlier, it is possible that this relationship isn't set in stone. We've learned that economics is not always comprised of positive statements, and it would be wise to assume that they are normative statements. Just like behavioral economists, we should look at the Philips curve as a suggestion, and not a absolute statistic. There are undoubtedly ways to reduce inflation and unemployment at the same time, and we just have to find them.
It makes 100% sense how the Phillips curve works; however, in an economy today, the rate of unemployment isn't always in an inverse relationship with the inflation. Inflation could be simply caused by the excessive wage increase that brings up the entire market up to a level that others may not be able to sustain with. Although the theory and concept itself may not be applicable to every scenario, it still serves a salient role in the U.S today.
The Federal Reserve is tasked with, among other things, fighting inflation. Inflation, if too high, can be very detrimental to workers. It is like a tax on people, often impacting the lowest paid the most, as basic necessities like food and transportation go up in price, but wages often lag. Thus, the Federal Reserve tries to keep inflation at a modest level. Inflation is impacted by many things, but too much money chasing the same goods would seem to be a cause, and the Phillips Curve shows this as it relates to unemployment. If unemployment is low, more people are working and earnings money, so there is more money to spend on goods and services, so prices will increase and cause inflation. This has been the conventional wisdom for many years, but there are also other factors currently which may be impacting inflation. One factor is the Covid stimulus money spent by the government during the pandemic, which flooded the economy with funds (for good reason). The other is higher energy prices from the war in Ukraine, which has also impacted food prices. It seems odd that having a government agency (the Federal Reserve) doing something like raising interest rates to increase unemployment (put people out of work) to keep prices down, but it seems that is the balancing act they need to follow. There can certainly be a debate if having slightly lower inflation is worth having the unemployment rate go up and people lose their jobs – many would argue against that.
I commend this attempt to bring in some topical economics while we study it. However, the tech layoffs are not directly related to inflation -- the Phillips curve is showing a relationship between lower inflation and higher unemployment, not higher inflation and higher unemployment. The tech layoffs at big firms like Meta are also not really in response to government policy responses related to inflation, but rather paring back overenthusiastic hiring done during the pandemic, before inflation hit and when said tech firms were making $$$ and making optimistic projections about their own growth. However, fighting inflation with higher interest rates will hit the VC/startup side of Silicon Valley as investors adjust to a new interest rate environment and become more selective with their funding, and perhaps make the bigger firms more selective with project funding moving forward, too. In a near zero interest rate environment, putting capital to work means investing in innovation or becoming a finance firm on the side. In a higher IR environment with less macro certainty on the horizon, firms can get decent returns without that much risk or trouble, and might not be chasing the next white whale with every last cent of incoming profits. Some of their shareholders might want dividend payments instead ;)
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