BEE Partner, South Africa Economy Watch

This rate has to be the target for which policy makers aim. If they try to reduce unemployment below this rate, they may temporarily succeed, but inflation will ultimately take off. If they raise unemployment above this rate, inflation will decline, but it will not stay lower, or even continue to fall, unless inflationary expectations are lowered. For this to happen, unemployment must stay high, but unnaturally high unemployment, coupled with lower than normal inflation, will lead employers to believe that real wages are exceptionally low. So they will begin to hire labor, and unemployment will move back to its natural level. Inflationary expectations are therefore unlikely to be lowered. Read the rest of this entry »

The idea behind the Phillips Curve is that higher inflation is associated with lower unemployment, and vice versa. Intuitively, this seems plausible enough. The stronger the economy, the more business is booming, the more jobs there will be. So we can expect the rate of unemployment to be lower. Indeed, it may fall to a point where shortages of various labor skills begin to emerge. In general, the more the economy is booming, the more likely there are to be shortages and inflationary pressures. By the same token, in a slump, excess labor and excess capacity will reduce inflationary pressures, and may even lead in some areas to price cutting. Read the rest of this entry »