This situation has led to questioning and discussion of the stable relationship between prices and unemployment [ 9 ]. The fact that the stagflation phenomenon that emerged in the late s could not be explained by Phillips Curve Analysis intensified the debate on the Phillips curve durin this period.
Under the fine-tuning policy, for example, if the government wants to reduce unemployment, it must increase total demand. However, it is necessary to endure some inflation increase with increasing total demand. According to Friedman and Phelps, the economy does not stabilize after the inflation rate rises. Because if the adaptive expectations approach is valid, when inflation rises, inflation-related expectations also rise.
In other words, the Phillips curve shifts to the right and unemployment returns to its natural rate again. In such a case, it is possible to reduce unemployment below its natural level with ever-increasing inflation. In this context, Friedman suggests that the stable relationship between unemployment and inflation is due to differing expected inflation and realized inflation rates.
When the expected and current inflation rates are the same, there will be no change in real wages and hence the level of employment. Because in this case, the expected inflation rate will be reflected in long-term wage contracts [ 11 ]. Friedman specifically emphasizes here that the temporary trade off relationship is due to false expectations about inflation that lead to rising inflation. In the long term, as a result of the revision of inflation expectations, the exchange relationship disappears and the curve becomes perpendicular to the horizontal axis [ 12 ].
According to neoclassical synthesis Keynesian economists the Phillips curve is negatively sloped that means there is an exchange between unemployment and inflation whereas the Monetarist economists argue that is only true in the short term.
In contrast, the new classical approach suggests that the Phillips Curve is a right perpendicular to the horizontal axis both in the short run and long run. According to the new classical analysis, according to rational expectations, unemployment always remains at the level of natural unemployment, except for unforeseen shocks and random errors under the assumption that there will be no systematic error in the forecast of inflation.
In other words, there is no relationship between unemployment and inflation. Since inflation is the same as expected inflation in rational expectations approach, current income is always at the level of natural income and unemployment is also at the level of natural and natural unemployment.
It is possible to deviate from the natural level of unemployment if the inflation estimate is incorrect. The fact that the economy is always in balance at the natural level of unemployment means at demand-side policies are unnecessary.
According to The New Classical Macroeconomics theory, which has Monetarist views at the point of origin, the conjuncture policy is ineffective. With monetary policies, it is not possible to increase production and employment levels even in the short term. The existence of a relationship between unemployment and inflation, that is, tradeoff between these two variables or not is important for policy proposals.
The Keynesian economists argue that if there is an exchange between unemployment and inflation, it is possible to achieve the desired result with the demand-side policies to be implemented. In this context, expansionary monetary and fiscal policies will lead to demand expansion, resulting in unemployment reduction, while demand-biased inflation increases will occur.
On the contrary if it is necessary to lower inflation, the shrinking policies that will be implemented require some amount of unemployment to be endured. In contrast, the Monetarist and new classical economists, who represent the orthodox approach, suggest that these two variables are independent of each other and that demand-side policies will have no effect on them.
In this approach, which argues that inflation is always a monetary phenomenon the public intervention in the economy with cyclical policies will have unnecessary and negative consequences. The below mentioned Figure 1 shows the relationship between the unemployment rate and the inflation rate in Turkey. According to the chart, there is an inverse relationship between the unemployment rate and the inflation rate in general.
In the period studied, the rate of increase in prices is low or vice versa during periods when unemployment rate is high in Turkey. This can be seen as a result of expansionary monetary policies implemented in developed countries to counter the negative effects of the crisis on unemployment. As with other developing countries, capital inflows have accelerated with the increase in money supply in the global dimension.
Intensive capital inflows can be said to have an effect that reduces unemployment by providing a high growth rate. This period occurs for the inflation and unemployment rising together and points to stagflationist developments. Relationship between unemployment rate and inflation rate — Figure 1 shows that the rate of unemployment and inflation rose by 4 and 7 percentage points respectively in the period — Therefore, while it is possible to talk about the existence of a relationship between inflation and unemployment rate in the short term, it is observed that there is no exchange between the two variables in the long term.
In other words, it is predictable that the expected impact of policies aimed at lowering the unemployment rate on inflation will be limited or short-term. Similarly, policies aimed at price stability should be expected to have a limited and short-term impact on unemployment.
One of the highlights of the analysis on unemployment is the relationship between growth and unemployment. The main expectation of given the main determinants of economic growth is the unemployment rate decreasing in an economy where the growth is occurring or at the least the current unemployment rate does not increase. In this context, the effects of economic growth on employment or unemployment rate are examined and whether growth creates employment is the subject of research both in the world literature and in Turkey [ 1 ].
Historically, it is observed that the relationship between economic growth and employment has weakened or, in other words, become more complex in recent periods. Economists who supported the structural adjustment policy predicted that employment would increase with the liberalization of foreign trade, which is the basis of the export-based growth strategy.
What many developing countries have experienced in recent years is far from confirming these claims of neoclassical theory.
In order to ensure adequate employment in an environment where the working age population is increasing at a high pace, growth must be sustained as well as high growth rates. The fact that the growth figures in Turkey have been below minus six percent three times since the s shows that the growth has been extremely unstable. This indicates that the growth due to short-term foreign capital inflows is not permanent and its fragility is high with the liberalization of capital movements [ 15 ].
Arthur Okun examined the relationship between the unemployment rate and economic growth in the United States by regression analysis using quarterly data for the period — According to the developed regression equation, the difference between current income and full employment income varies in the opposite direction with the unemployment rate [ 16 ].
The law developed by Okun states that if the growth rate exceeds the trend or average growth rate measured at 2. Exactly, the question of how much e ach percentage point of GDP growth that exceeds the growth trend will lower the unemployment rate is being sought. The Okun law can be expressed by the following equation;. This ratio varies from country to country. In the years in which the economy performs growth above the natural rate, there will be a change in the unemployment rate to k times the difference between the actual and natural growth rate.
Accordingly, the relationship between growth and unemployment for the United States can be written as:. Data covering the period — showed that unemployment decreased by 0. In this context, the equation of Okun law for Turkey was found as follows:. This study shows that the Okun law works very poorly for Turkey. The negative-directional regression line obtained in this study using regression analysis revealed the existence of an inverse relationship between the change in unemployment rate and the growth rate.
However growth has an impact on unemployment it must be at least 4. It is seen that similar results have been reached in many different studies on Turkey.
These calculations indicate that growth in the period of expansion of the conjuncture in particular had very low effects on employment, and hence the presence of non-employment growth. Another important finding obtained in these studies is that the relationship of Okun in the Turkish economy has an asymmetric structure, that is the effect of reducing unemployment during the expansion period of real output and the increasing unemployment during the contraction period are not same [ 3 ].
When the relationship between the growth rate and the unemployment rate are examined in — period in Turkey it is observed that there is an inverse relationship between growth and unemployment, especially during crisis periods. The unemployment rate reached high levels in , and , and in later years in some periods it began to decline, albeit lagging. Similarly, with the negative growth conditions caused by the foreign exchange crisis that took place in , unemployment started to rise and reached its highest value in with On the other hand, the impact of the cyclical revival in the economy on unemployment remained relatively weak.
It can be said that the decrease in the unemployment rate remained extremely limited in , when the growth rate was the highest in the period studied. In the period of expansion that took place in and , unemployment did not decrease, but rather started to increase Figure 2.
Relationship between growth and unemployment rate — Despite the high economic growth rates achieved in Turkey in recent years, this performance is not reflected in unemployment rates to the same extent, causing controversy.
An economic growth model that depends on consumption-based foreign capital movements that do not provide employment is not sustainable. Considering the presence of rapid population growth and a demographic structure with a young population, it is of great importance to develop an economic growth model with policies based on production, providing employment, focused on high value added products and reducing external dependence [ 17 ]. The current account deficit is less than the amount paid for goods produced and sold abroad to be consumed domestically, indicating that a country is making negative savings [ 20 ].
The relationship between the current account deficit and growth can be two-way relationship. Firstly the country with insufficient savings ratio or negative savings, the current account deficit can affect growth as investment spending is financed through the use of external savings. Second, as if income growth will increase demand for imported goods, the growth current account deficit may affect growth or may occur as a result of the growth rate itself.
The effect of the current account deficit on the growth rate is explained by providing investments with foreign savings if domestic savings are insufficient. It can be stated as follows if the savings are insufficient in an economy, investments are financed by borrowing of Foreign World Savings. In this context, as emphasized in both development economics and growth models, the source of growth is investment and the source of investment is savings ratio.
If domestic savings are insufficient, it means that the difference can be met by using foreign sector savings and the current account deficit. The current account reflects the relationship between the financial markets and the goods and services markets in an economy. In the balance of payments, by definition, the current account deficit should be financed by capital account.
In other words, the current account deficit may only be possible if necessary financing is provided in the capital account in the balance of payments. International flows of goods and capital are two sides of the coin and this can be explained by the national income accounting authority as follows [ 21 ]:. This identification shows the components of National Income Y , under the assumption of equivalence of public revenues and expenses.
Total revenue equals household consumption expenditures C , private sector investment expenditures and the difference between exports X and imports M , i. When necessary adjustments are made here, it can be shown that net exports or the current account balance in a broad sense are equal to the domestic savings investment difference.
Within the framework of this identification, for example, a study covering the s for the United States concluded that the current account deficit could be explained by the lack of savings.
In other words, the level of domestic investment is being supported by flows of foreign saving. The study also emphasizes that external savings flows are equal to the negative value of the current account balance [ 22 ].
The many studies similarly have found that the current account deficit affects the growth rate in Turkey as well. For example, changes in the current account deficit were shown to affect economic growth using the structured VAR method by evaluating the quarterly data in — [ 23 ]. The relationship between the current account deficit and growth in Turkey is closely related to the need for Energy oil , investment goods and intermediate imports, as well as the insufficient savings rate.
The realization of investments and therefore growth is linked to the current account deficit through the increase in imports. The consumption expenditures depend mainly on income in the Keynesian approach.
Since income growth will affect demand for both domestic and imported goods, it will put a negative pressure on the current account. Thus, in this case, the rate of growth is the independent variable and the current account is the dependent variable, which varies accordingly. The relationship between these two variables is oriented from growth rate to current account balance. The import expenditure represented by M is an increasing function of income in the equality 6.
The volume of imports consists of two components such as autonomous and revenue-dependent in the Keynesian model. Hence the total amount of imports varies in the right direction with income depending on the marginal import trend considered constant [ 24 ]. İt is observed that the mutual causality relationship is towards growth to current account deficit. Figure 3 shows the ratio of the current account to GDP ratio and the growth rate in Turkey over the last 20 years.
In the period examined, it is observed that the current account deficit increases during the expansion process and the current account deficit decreases during the contraction periods in Turkey. In addition, the current account balance has been continuously negative except the years and Similar to when the growth ratio reached its highest value Source: OECD.
To summarize it is observed that while growth accelerated when the current account balance in Turkey gave a deficit. The growth slowed when the current account balance gave a surplus.
In this context, the ratio of the current account deficit to GDP was 4. In the same period, the growth rate started to decrease and reached 0. In this study, the degree of stationarity of series are found with Dickey Fuller and Ng -Perron methods.
Between series interaction are measured with classic [ 25 ] causality test, [ 26 ] were analyzed by symmetric latent causality test and [ 27 ] asymmetric latent causality test methods.
While [ 27 ] are developing symmetric and asymmetric implicit causality tests, [ 25 ] suggested the analysis which negative and positive shocks can be separated for the cointegration analysis with using the cumulative totals of these shocks. Firstly these series are divided into positive and negative shocks before these causality tests.
If causality relationships between two series such as y 1 t and y 2 t series,. Other models will be helping one by one for each dependent variable with lagged independent other variables. When null hypothesis rejected that means there is causality for each taken dependent variable to independent variables. They [ 26 ] refer to this causality analysis performed between the same types of shocks, [ 27 ] named this causality test asymmetric causality test performed between different types of shocks.
While economists and academics make convincing arguments that there is a certain natural level of unemployment that cannot be erased, elevated unemployment imposes significant costs on the individual, the society, and the country.
The costs of unemployment to the individual are not hard to imagine. Prior to the Great Recession , the average savings rate in the U. However, the economic consequences can go beyond just less consumption. Many people will turn to retirement savings in a pinch, and draining these savings has long-term ramifications. Prolonged unemployment can lead to an erosion of skills , basically robbing the economy of otherwise useful talents. At the same time the experience of unemployment either direct or indirect can alter how workers plan for their futures—prolonged unemployment can lead to greater skepticism and pessimism about the value of education and training and lead to workers being less willing to invest in the long years of training some jobs require.
On a similar note, the absence of income created by unemployment can force families to deny educational opportunities to their children and deprive the economy of those future skills.
Last but not least, there are other costs to the individual. Studies have shown that prolonged unemployment harms the mental health of workers and can worsen physical health and shorten lifespans. The social costs of unemployment are difficult to calculate but no less real. When unemployment becomes a pervasive problem, there are often increased calls for protectionism and severe restrictions on immigration.
Other social costs include how people interact with each other. Studies have shown that times of elevated unemployment often correlate both with less volunteerism and higher crime. The volunteerism decline does not have an obvious explanation, but could perhaps be tied to the negative psychological impacts of being jobless or perhaps even resentment toward those who do not have a job.
The economic costs of unemployment are probably more obvious when viewed through the lens of the national checkbook. Unemployment leads to higher payments from state and federal governments for unemployment benefits, food assistance, and Medicaid. Unemployment is also a dangerous state for the U. The production of those workers leaves the economy, which reduces the gross domestic product GDP and moves the country away from the efficient allocation of its resources.
It is also worth noting that companies pay a price for high unemployment as well. Unemployment benefits are financed largely by taxes assessed on businesses. Not only do companies face less demand for their products, but it is also more expensive for them to retain or hire workers. Governments rightly fret about the consequences of inflation, but unemployment is likewise a serious issue. Apart from the social unrest and disgruntlement that unemployment can produce in the electorate, high unemployment can have a self-perpetuating negative impact on businesses and the economic health of the country.
Worse still, some of the more pernicious effects of unemployment are both subtle and very long-lasting. Consumer and business confidence are key to economic recoveries, and workers must feel confident in their future to invest in developing the skills—and building the savings—that the economy needs to grow in the future.
The costs of unemployment go far beyond the accumulated sums handed out as unemployment insurance benefits. The New York Times. Department of Labor. International Monetary Fund. Federal Reserve Bank of St Louis. United States Department of Labor. University of California, Los Angeles. Accessed March 10, US National Library of Medicine. American Immigration Council.
Sage Journals. Urban Institute. Bureau of Economic Analysis. Mises Institute. Internal Revenue Service. Accessed March 8, Personal Finance.
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