Unemployment and Unanticipated Inflation in Postwar Britain

Abstract

Since 1950 the measured rate of unemployment in Britain has risen from around 14 per cent of the labour force to over 6 per cent, with most of the increase dating from the late 1960s. Between the peaks and troughs of six postwar business cycles the rate of unemployment has swung by I 42 per cent. The purpose of this paper is to assess how much of this trend and cyclical variation in unemployment is attributable to incorrect anticipations of inflation on the part of workers and employers, and how much to other factors operating on supply and demand in the labour market. The investigation is conducted within a simple neoclassical model of the labour market, and involves estimating the parameters ca, ,6 and y in the following unemploy ment equations: