Relationship between Unemployment and Inflation Free Essay

 Analysis of Unemployment in the Australian Economy 


The relationship between unemployment and inflation is normally explained through The Phillips Curve.  Essentially, the level of labor productivity determines the rate of inflation. Therefore, high rates of unemployment results in low labor productivity which further causes inflation  (Coase & Wang, 2012). When the unemployment rate is low, money wages increases and an increase in money wages which is characterized by high labor productivity leads to inflation.

In the Australian economy, there is a significant relationship between unemployment and inflation. Essentially, in every economy, high unemployment rates lead to the high inflation rate in the country. Therefore, there is a certain level of unemployment representing full employment. Initially, during the early 1990s, the rate of unemployment declined as employment increased  (Coase & Wang, 2012). Inflation also became moderate leading the economists to raise questions concerning the practical utility pertaining to the notion of natural rate for policy reasons.

However, The Phillips Curve shows an inverse relationship between high inflation and lower unemployment. Actually, full employment is estimated to be 5% (Borland, 2015). In Australia, the inflation rate has been low for a while, regardless of the employment statistics depicting that Australia is close to attaining full employment which is actually viewed as a mystery.  However, as a matter of facts, 5% unemployment does not mean what is used to in the past. Currently, 5% of unemployment may be equal to 6 or 7% unemployment some decades in the recent past. With regards to the 1998 – 2014 unemployment trend, a 5% unemployment rate would have suggested a wage growth of more than 3.5% (Borland, 2015). Normally, as unemployment rates decline inflation rises to cause the curve to be steep.


Currently, unemployment in Australia has steadily decreased but inflation has stayed low.  This is partially clarified by the low wage rise, taking into account the natural relationship that exists between high wages and people who pay more for products and services. Australia currently has an annual rate of about 1.9% wage rise which is still below inflation regardless of the current strength in overall employment (Borland, 2015). Australia’s monthly employment surpassed the forecasts in 2017 and if another increase in employment will be experienced will mark ten months of Australia’s employment growth.