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Conflict Between Employment and Inflation: Theory and Facts

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  • Rangarajan, C

Abstract

Is there a trade-off between inflation and employment? Can policy-makers generate more employment through a deliberate policy of inflation? These questions have been debated at length since the introduction of the celebrated Philips Curve which empirically showed a negative relationship between the rate of change in money wages and unemployment rate. The Philips curve, as its best, is an explanation of the trade-of between wage changes and employment in a disequilibrium situation. Int he long run, such a trade-off can exist only if expectations of price changes continually remain below the actual changes. The link between price changes and employment goes beyond the dynamics of the labour markets. The same is true when one thinks of the relationship between price change and growth rate of the economy. In this paper, we have examined the Indian data in relation to price changes and output changes in the industrial sector. Employment and output are well correlated but the rate of growth of the former is lower than that of the latter. In general, it appears that periods marked by sharp increase in price lever are associated with lower growth rates output and years of low price changes with high growth rates in industrial output. A disaggregated analysis of the output and price changes relating to various industry groups also indicates a negative association between price change and output change. There can be several explanations for this phenomenon. Causation can run in either direction. However, the general conclusion is that contrary to the general belief, industrial output has grown faster in periods of small price increases than in periods of high price increases. There is also no evidence to show that price changes have had any effect upon savings.

Suggested Citation

  • Rangarajan, C, 1981. "Conflict Between Employment and Inflation: Theory and Facts," IIMA Working Papers WP1981-02-01_00424, Indian Institute of Management Ahmedabad, Research and Publication Department.
  • Handle: RePEc:iim:iimawp:wp00424
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