Relationship between wage growth and unemployment

Relationship between wage growth and unemployment

Wages growth and reduction have been known to be affected by the rate of unemployment within a particular economy whereby an increase in unemployment have caused a slow rise in wages and decrease in unemployment had contributed to rise in the wages.Relationship between wage growth and unemployment  These relationships between wages and unemployment have been explained through the Philips curve who has been studying inflation and unemployment in the United Kingdom. According to Philips, firms and organizations must raise wages since lowering of the unemployment rate indicated a tight knob of the labor market hence raise of wages will attract more laborers. According to Olafsson, the curve indicates an inverse relationship between the rate of inflation and the rate of unemployment within a particular economy (48). Higher unemployment rates indicate an increase in the labor supplies hence the firm and organization has surplus labor, hence lowering the minimum wages offered to a particular employee.

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The Phillips curve representing relationship between wages behavior and unemployment rates adapted from Hoover in the journal of Economic Methodology (3)  in United States from 1960-1969 


(Adopted from Benati 5)

The graph above has been used in the indication of wage inflations in the situations where unemployment rate persisted in a particular economy. Phillips curve have been used in the estimations of economic curves of most nations especially in the indication or relationship between wages inflation and unemployment rates. According to the graph above, the rate of inflation increased when the rate of unemployment had not grown, however, as the years goes by, the rate of wages inflation decreases and this affected the rate of unemployment as labor became more and more scares.

Arguments of Benati, indicates that most of the authorities have been increasing the inflation rates ever time  price and wages controllers tries to rise higher to control the rate of unemployment beyond the manageable level within an economy (13).Relationship between wage growth and unemployment However this could result into unending conflicts between the government and price setters since the government will be pushing to equilibrium rate of inflation at a higher rate while the settlers will realize the situation and reduce the wages and prices.

Most of the economists in the United States have used the Philips curve in explanation of price inflations to unemployment since there is a close connection between the prices company charges and the wages being offered.  However, most of the economist have been using Phillips curve in formulations of economic policies due the close relationship between the data and estimated curve.

As stated by Benati, much of the policies made following the deductions made from the Phillips curve were used in controlling of unemployment rates whereby the Government of the United States estimated that raising economy would lower unemployment by one percent in one budget period (15). Following the assumption made from the Phillips curve, higher inflation would be slightly higher than half a percentage point.

However, a reduction in unemployment rates by one percent would indicate more rise in inflation to about one and quarter percentage. Relationship between wage growth and unemployment Furthermore, the peak of Philips curve being used in policy formulation has been challenged by economists due to much of poor theoretical foundations. Informed workers and rational employees will only pay attention to inflations and will adjust the purchasing power in the situation whereby the peaks of the curve will be used in the formulation of economic policies.

Governments attempt to regulate the unemployment rates by the use of fiscal or monetary policies would result in the firms and organizations offering employments to raise their prices at a higher rate than the expectations of workers. According to Olafsson, failure of the firms to raise their prices would in return affect their profits and would appear to run on cyclic production where no returns are generated after payments of workers (32).

High rate of unemployment, as stated by Gozgor, cost the government much and the end result, the taxpayers feels the effects more as taxes rates are also raised (10). However, by formulating on policies that will lower the rate of unemployment within a nation, the government should also be considering the effects on inflation and also future of prices within an economy.  High rates of unemployment not only affects the government expenditures but also alters the social costs since vices will be sprouting from an economy such as crimes, smuggling and other forms of illegal business.

Furthermore, the government will have increased its cost of eliminating such vices within society and in the maintenance of prisoners convicted of crime actions as well as in rehabilitation of drug addicts’ victims. Moreover, failure to control inflation which might contribute to levels of unemployment will increase the cost of living to the unemployed adults since they have to meet the basic requirements of life as well as loosing skills and knowledge acquired when a person was in college. Following the arguments of Gozgor, labor is a resource and once wasted cannot be recovered and the idle lying resources implicates that an economy will be at point within is production possibility frontier (15).

Work cited.

Benati, Luca. Evolving Phillips. European Central Bank journals. (2010) 1170, 4-20


Gozgor, Giray.  The New Keynesian Phillips Curve in an Inflation Targeting Country: The Case of Turkey. International Journal of Economic Sciences and Applied Research. (2013) 6, (1), 7-18

Olafsson, Thorvardur. The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy. Department of economics: Central Bank of Ice Land journals. (2006) 31, 1-79