Inflation and Unemployment | Social Studies

March 2, 2016 Jennifer Brandt

Inflation and Unemployment | Social Studies 

Inflation is discussed a lot in the field of economics. According to Investopedia.com, inflation is the rate at which prices for goods and services increase while the purchasing powers of money decrease. Specifically, you get less for your money than you used to.

For example, from 1980 to 2011, the price of a stamp increased 193%, according to the United States Postal Service:

In preparation for the TASC Test Assessing Secondary Completion™ Social Studies subtest, we’ll take a deeper look at the concept of inflation and how it relates to unemployment. 

What causes inflation? 

Two popular theories try to answer this question, according to Investopedia.com:

  • Prices increase with Demand-Pull Inflation when the demand of a product is growing faster than the supply of a product.
  • Cost-Push Inflation occurs when costs of a company increase (wages, taxes, imports), requiring the company to increase prices of services to maintain a profit. 

The Phillips Curve: Inflation and Unemployment

The relationship between inflation and unemployment was first discussed in a study conducted by A. W. Phillips – an economist from New Zealand – in 1958. The study stated that when:

  • Unemployment was high, inflation was low
  • Unemployment was low, inflation was high (increasing rapidly)

The following image is an example of the Phillips Curve from SparkNotes.com. Every country has a different Phillips Curve, depending on the country’s economic state in a given year.

Let’s see how inflation and unemployment play out in this real life example:

Alice is the owner of a local restaurant called Spice. The U.S. economy is in recession (a temporary period of economic decline where trade and industrial activity is reduced) and her restaurant is struggling to make a profit. Why?

The restaurant’s customers have had to cut their budgets due to the weak economy and can no longer afford to eat out. Because of this, Alice is forced to lay off employees to cut costs and keep the restaurant open.

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