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What has happened to the trade off between inflation and unemployment in the UK In the UK the trade off between inflation and unemployment has improved ie the UK has experienced falling unemployment without raising inflation. Why? There are four key issues:- The labour market A more flexible labour market has increased the size of the labour supply and a reduction in trade union power has reduced the collective bargaining power of many workers. Falling long-term unemployment is a sign of a reduction in structural unemployment rates. NAIRU (the non accelerating inflation rate of unemployment) has come down. It is estimated that the NAIRU has fallen from nearly 10% of the labour force in 1992 to around 5% in the last few years. The effect of inflation targets Introducing inflation targets Ifirst introdued in 1992) has reduced inflation expectations. Low inflation in the global economy: Inflation across the globe has been low Globalisation has increased the intensity of competition between nations and reduced the prices of many imported products. Technological change and innovation has raised labour productivity and cut production costs These fundamental changes in the supply-side of the British and international economy has been a key factor keeping inflation low even though unemployment has been falling. |