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ECONOMICS IN THE REAL WORLD

Unemployment and inflation

What’s the relationship?

The health of an economy is monitored through a range of measures, including the unemployment rate, the inflation rate, growth of GDP, and the size of the public-sector debt. In this column, we will focus on unemployment and inflation, and will try to evaluate whether there exists a consistent relationship between these measures

The data we will consider in this column consist of time-series observations of unemployment and inflation statistics for the UK. Time-series data provide us with repeated observations of a single location (or individual) over a certain time period. This may be annual data, monthly data, daily data or even, in the case of stock transactions data by the second. Most statistics about the health of the economy are published on either a monthly, or a quarterly basis, and in this column we will focus on this type of time series.

While the level or rate of unemployment may provide an indication of the health of the economy, when people leave employment it is not necessarily the case that unemployment increases. The reason for this is the way that unemployment is defined (based on the International Labour Organization’s definition). The unemployment rate is the proportion of the economically active population (i.e. individuals either in work or are actively looking for work) who are not in employment (Figure 1).

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