CORRELATION BETWEEN INFLATION RATE AND UNEMPLOYMENT RATE

William Phillips (1958) stated that there is negative correlation between inflation rate and the rates of unemployment. It's such a trade-off, when the level of unemployment decreases, the inflation rate goes higher. I myself was curious to prove the truth of the statement. I took the Indonesia's unemployment rate and inflation rate data since 1998-2013 and the result says so. 

Based on the picture below, the correlation is -0.3087 which means between unemployment rate and inflation rate have an inverse relationship.

You can also chceck out the scatter diagram below:

But, Phillip's study was just in short run. The question is, why can this happen ? Here is the explanation. As the unemployment level decreases will correlate with higher change of money wage. When the rate of unemployment rises, there will be less money supply. Since the economists say with the less money supply, the less inflation rate; that's true!

On the other hand, the increasing unemployment reduces the purchasing power. Yes, it's a trade-off. The only way to control the inflation is to change the mindset of the labor, to invest their money that it will be quite productive. In the next post, I'd like to discuss how to control the inflation.