Victim relationship (economy)

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The sacrifice ratio (English: sacrifice ratio ) is a word from the Macroeconomics and indicates what percentage of the annual gross domestic product must be "sacrificed" and the employees to the inflation to reduce by one percentage point. It is derived from the Phillips curve after Phillips, Samuelson and Solow, which was expanded in 1960 and describes the relationship between unemployment and inflation.

Derivation and calculation of the victim ratio

The extended Phillips curve describes the relationship between unemployment and inflation. From this econometric regression analysis , the victim ratio number or the victim ratio is derived and calculated.

Illustration of the extended Phillips curve

The illustration of the extended Phillips curve shows that a decrease in inflation (disinflation) by β corresponds to an increase in the unemployment rate of 1. The victim relationship is therefore:

In concrete terms this means:

Annual percentage points of excess unemployment is the difference between actual and natural unemployment. For example, if the natural unemployment rate is 8% and the unemployment rate for 4 years is 10%, then the annual percentage points of excess unemployment are calculated as follows:

The long-term unemployment rate is often used as natural unemployment. Actual unemployment describes the current unemployment rate.

The decline in inflation is given in percentage points . For example, a decrease in the inflation rate from 10% to 6% means a disinflation of 4%.

Example US economy between 1979 and 1985

Starting position

Using the example of the USA in the period from 1979 to 1985, the victim ratio was calculated here.

% 1979 1980 1981 1982 1983 1984 1985
GDP growth 2.5 -0.5 1.8 -2.2 3.9 6.2 3.2
Unemployment rate 5.8 7.1 7.6 9.7 9.6 7.5 7.2
inflation rate 13.3 12.5 8.9 3.8 3.9 3.9 3.8
cumulative unemployment 1.0 2.6 6.3 9.3 11.4 12.6
cumulative disinflation 0.8 4.4 9.5 9.5 9.4 9.5
Victim relationship 1.25 0.59 0.66 1.04 1.12 1.32

The sum of the annual percentage points of excess unemployment since 1980 was used to calculate the accumulated unemployment . The natural unemployment rate was set at 6.0%. The difference between the inflation rate for one year and the inflation rate for 1979 gives the cumulative disinflation.

Observations

  • The victim ratio levels off around 1. This meant that around 10% disinflation increased unemployment by 10 year points.

criticism

  • In the victim relationship, the loss of income is only considered in nominal terms, calculated in monetary units, the purchasing power of money is not taken into account.
  • The possibilities of redistributing inflation are ignored. So prevent z. B. Collective agreements that a price increase (inflation) is followed by a wage increase. The additional income gained through the price increase remains with the entrepreneur. In this respect, the victim relationship could lead to misunderstandings.
  • The term of collective agreements is not considered. Collective agreements can e.g. B. prevent workers from being laid off in favor of disinflation. Thus, the victim ratio in economies with short collective bargaining terms is lower than in economies with longer collective bargaining terms. This results from the fact that with short-term collective agreements the economy can act faster or earlier in a disinflation.

Summary

Assuming that the state can influence unemployment through fiscal and monetary policy measures, it has to choose between two evils: high unemployment or high inflation. In the short term, there is a so-called " trade off " between the two . Because in an economy high unemployment is just as undesirable as high inflation. A rise in the unemployment rate is bought at the price of falling inflation. Since the additional unemployed do not intervene in the production process, their possible productivity is given away or sacrificed. Hence the name victim relationship. On the other hand, lowering the unemployment rate leads to higher inflation.

In the long term, higher inflation does not lead to an increase in employment or a decrease in unemployment.

Individual evidence

  1. ↑ http://www.wiwiwiki.net/index.php?title=Erweiterte_Phillips-Kurve Extended_Phillipskurve, April 20th 2008
  2. ↑ Own presentation based on: BLANCHARD, Olivier and ILLING, Gerhard, Makroökonomie, 3rd edition, Pearson, Munich, 2004, page 287.

literature

  • Oliver Blanchard, Macroeconomics , 3rd ed., Prentice Hall International, London, 2003. ISBN 0-13-110301-6
  • Oliver Blanchard, Gerhard Illing, Macroeconomics , 4th ed., Pearson, Munich, 2006. ISBN 3-8273-7199-6

Web links