[MUSIC] Welcome to The Power of Macroeconomics. [MUSIC] Lecture Five: Unemployment, Inflation, and Stagflation. The purpose of this lesson is to examine much more closely three of the most important problems in macroeconomics. Unemployment and inflation, and the combination of these two problems known as stagflation. >> Unemployment and inflation, inflation and unemployment, these are two of the most important problems in macroeconomics. And in most cases macro economists can solve at least one of them, but only by worsening the other. For example, expansionary, fiscal, or monetary policy can usually pull an economy out of a recession. But such actions may cause inflation. On the other hand, contractionary policies typically can be used to fight inflation but often at the cost of more unemployment and recession. But, what happens when an economy faces both high unemployment and soaring inflation, as many nations of the globe did during the turbulent 1970's? Are traditional Keynesian-style monetary and fiscal policies still effective in fighting such stagflation? In order to answer this important question we've got to learn a lot more about what makes both unemployment and inflation tick. In doing so, we're going to learn about one of the great debates in macroeconomic theory. Mainly, is there a clear trade off between unemployment and inflation as advocates of the so-called Phillips Curve suggest. Or is the Phillips Curve simply a dinosaur concept of a failed Keynesianism. In this lesson we're also going to compare and contrast the Keynesian and Monetarist views of stagflation and then illustrate why the doctrine of Supply Side economics emerged in the 1980s as a viable, political alternative to these two competing economic camps. To begin, let's review some basic concepts about unemployment. In thinking about the unemployment problem, the economist identify three different kinds, frictional, structural, and cyclical. Frictional unemployment is the least of the economists worries. It arises because of the incessant movement of people between regions and jobs or through different stages of their life cycle. For example, even when an economy is at full employment, there is still some turnover as students search for jobs when they graduate from school and when women renter the labor force after having children. Cyclical unemployment is a much more serious problem. It occurs when the economy dips into a recession and it is this type of unemployment that macroeconomist have historically spent most of their time trying to solve. In an increasingly technological age, the third type of unemployment, structural unemployment has begun receiving more attention. Structural unemployment occurs when there is a mismatch between available jobs and a skills workers have to perform them. It often results when technological change makes someone's job obsolete. The highly-skilled glass blower thrown out of work by the invention of bottle-making machines, or the specialized auto worker replaced by a robot. A second source of structural unemployment, results from a mismatch between the location of workers and the location of job openings. For example, in the 1980's when the price of oil plunged, many oil field workers in the oil producing states found themselves structurally unemployed when widespread layoffs occurred, even though unemployment was low in other parts of the country. This distinction between cyclical, frictional and structural unemployment is important because it helps economist diagnose the general health of the labor market and craft appropriate policy responses. For example, in the presence of cyclical unemployment due to recession, expansionary fiscal or monetary policies may be quite appropriate. However, structural unemployment often requires more targeted policies such as job retraining.
