<p><a href="http://en.wikipedia.org/wiki/Stagflation" rel="nofollow"><strong>Definition</strong></a> <em>In economics, stagflation, a portmanteau of stagnation and inflation, is a situation where the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high.</em></p>

<p>Stagflation hence requires a high unemployment rate. The unemployment rate can be defined as </p>

<p>$$ u = \frac{U}{POP}\\
u =\frac{U}{LF} 
$$</p>

<h3>Direct increase of unemployment?</h3>

<p>that is, either the number of unemployed over population (more common) or over the labor force. Removing women and teens from the labor force does not affect anything in the first definition, and decreases the unemployment rate by the second definition.</p>

<h3>Indirect increase of unemployment?</h3>

<p>As stagflation requires a high unemployment rate, reducing the labor force size cannot directly create stagflation. Your only argument could then be that a reduced labor force somehow leads to a higher unemployment rate. Most likely, this is orthogonal. Equilibrium unemployment is a composite of frictional unemployment and voluntary unemployment. I cannot think of a reasonable argument why a reduction of the labor force should increase the relative share of either of these (unless of course, voluntary unemployment is higher among men than women, which is false).</p>

<h3>Level effects and growth rate effects</h3>

<p>Even more importantly, there is an important distinction between shocks to the level versus shocks to the growth rate. To the extent that - after women and teens have left - the growth rate of the labor force is the same as before, long term effects are negligible. </p>

<p>In a world with exponential growth, a shock to the level is - in the long run - negligible, as we will catch up quite quickly. A shock to the growth rate however, is permanent. Of course, "<em>in the long run</em>" is relative, but there is some idea of persistence behind stagflation. An exit of women from the labor force would, in my opinion, cause a sudden drop in output, but <em>would not affect growth rates</em>.</p>

CC BY-SA 3.0
2015-05-07T19:20:11.803Z
So a drop in output caused by a leftward shift of short run supply curve will cause inflation due to the AD/AS diagram while the AD didn't change, right?
Kun
CC BY-SA 3.0
2015-05-07T19:23:13.887Z
@Kun You have a bunch of people who are not working any more, and hence have lower income. Are you sure that their demand is the same?
FooBar
CC BY-SA 3.0
2015-05-08T13:46:06.167Z
@Kun if the answer was sufficient and helpful, don't forget to mark it as such (answered).
FooBar
CC BY-SA 3.0
2015-05-07T18:58:01.610Z
2015-05-07T19:05:16.560Z
2015-05-07T19:05:16.560Z
FooBar
<p>Which of the following best explains how an economy can experience stagflation.</p>

<ol>
<li>Women and teenagers stayed out of the labor force.</li>
<li>Negative supply shock cause the factor prices to increase.</li>
</ol>

<p>Official answer : 2.</p>

<p>My thoughts: While 2 is correct, I think 1 is also correct. the fact the  women and teens stay out of the labor force will increase the wage and thus cause the supply curve to shift to the left and thus cause stagflation. Am I wrong?</p>

CC BY-SA 3.0
2015-05-07T16:22:21.000Z
Are you talking about shocking the labor force (i.e. all women and teens exit market on May 7th, 2015) or an economy in which women and teens are not a part of the labor force?
Nox
CC BY-SA 3.0
2015-05-07T16:33:40.163Z
In a normal economy, which could cause an stagflation. 1 or 2.
Kun
CC BY-SA 3.0
2015-05-07T18:29:44.850Z
Number 2 is "best", because it has historical precedent in the United States 1980s, whereas suddenly removing all labor force is unprecedented. "Best" prohibits this type of "both right" answer contesting.
RegressForward
CC BY-SA 3.0
2015-05-07T18:59:44.417Z
"cause the supply curve to shift and thus cause stagflation". If I were to grade this kind of hand waiving argumentation, it'd get 0 points.
FooBar
CC BY-SA 3.0
2015-05-07T19:07:34.183Z
@RegressForward Also, the question is *which of the following best explains how an economy **can** experience stagflation*. If you replace *can* with *has*, *empirical precedent* is a proper argument. Otherwise, just because it didn't, doesn't mean it won't.
FooBar
CC BY-SA 3.0
2015-05-07T19:16:49.337Z
First, define stagflation (high inflation, low growth, high unemployment). For each of these, show exactly how they are generated by 1. "Supply curve shifts and thus causes stagflation" is a hand waiving argument because you "wave your hands" but don't say exactly how it is causing it. Is a supply shift causing higher unemployment? **How** will it affect inflation?
FooBar
CC BY-SA 3.0
2015-05-08T15:11:42.103Z
I suppose I would.say the best way to be sure something "can potentially do X" would be to show it "already has done X". But I admit this is getting tangential to OPs ideal potential question, which revolves around the plausibility of idea 1.
RegressForward
<macroeconomics>
Stagflation and the Labor Force
Kun
# Stagflation and the Labor Force

(Asked by: username_0 on 2015-05-07)

Which of the following best explains how an economy can experience stagflation.

1. Women and teenagers stayed out of the labor force.
2. Negative supply shock cause the factor prices to increase.

Official answer : 2.

My thoughts: While 2 is correct, I think 1 is also correct. the fact the women and teens stay out of the labor force will increase the wage and thus cause the supply curve to shift to the left and thus cause stagflation. Am I wrong?

**Tags:** macroeconomics

> **Comments:**
> **username_1**: Are you talking about shocking the labor force (i.e. all women and teens exit market on May 7th, 2015) or an economy in which women and teens are not a part of the labor force?  
> **username_0**: In a normal economy, which could cause an stagflation. 1 or 2.  
> **username_2**: Number 2 is "best", because it has historical precedent in the United States 1980s, whereas suddenly removing all labor force is unprecedented. "Best" prohibits this type of "both right" answer contesting.  
> **username_3**: "cause the supply curve to shift and thus cause stagflation". If I were to grade this kind of hand waiving argumentation, it'd get 0 points.  
> **username_3**: @username_2 Also, the question is *which of the following best explains how an economy **can** experience stagflation*. If you replace *can* with *has*, *empirical precedent* is a proper argument. Otherwise, just because it didn't, doesn't mean it won't.  
> **username_3**: First, define stagflation (high inflation, low growth, high unemployment). For each of these, show exactly how they are generated by 1. "Supply curve shifts and thus causes stagflation" is a hand waiving argument because you "wave your hands" but don't say exactly how it is causing it. Is a supply shift causing higher unemployment? **How** will it affect inflation?  
> **username_2**: I suppose I would.say the best way to be sure something "can potentially do X" would be to show it "already has done X". But I admit this is getting tangential to OPs ideal potential question, which revolves around the plausibility of idea 1.  

---

## 1 answers

### Answer by username_3 on 2015-05-07. Score: 2 | Accepted answer

[**Definition**](http://en.wikipedia.org/wiki/Stagflation) *In economics, stagflation, a portmanteau of stagnation and inflation, is a situation where the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high.*

Stagflation hence requires a high unemployment rate. The unemployment rate can be defined as

$$ u = \frac{U}{POP}\\
u =\frac{U}{LF}
$$

### Direct increase of unemployment?

that is, either the number of unemployed over population (more common) or over the labor force. Removing women and teens from the labor force does not affect anything in the first definition, and decreases the unemployment rate by the second definition.

### Indirect increase of unemployment?

As stagflation requires a high unemployment rate, reducing the labor force size cannot directly create stagflation. Your only argument could then be that a reduced labor force somehow leads to a higher unemployment rate. Most likely, this is orthogonal. Equilibrium unemployment is a composite of frictional unemployment and voluntary unemployment. I cannot think of a reasonable argument why a reduction of the labor force should increase the relative share of either of these (unless of course, voluntary unemployment is higher among men than women, which is false).

### Level effects and growth rate effects

Even more importantly, there is an important distinction between shocks to the level versus shocks to the growth rate. To the extent that - after women and teens have left - the growth rate of the labor force is the same as before, long term effects are negligible.

In a world with exponential growth, a shock to the level is - in the long run - negligible, as we will catch up quite quickly. A shock to the growth rate however, is permanent. Of course, "*in the long run*" is relative, but there is some idea of persistence behind stagflation. An exit of women from the labor force would, in my opinion, cause a sudden drop in output, but *would not affect growth rates*.

> **Comments:**
> **username_0**: So a drop in output caused by a leftward shift of short run supply curve will cause inflation due to the AD/AS diagram while the AD didn't change, right?  
> **username_3**: @username_0 You have a bunch of people who are not working any more, and hence have lower income. Are you sure that their demand is the same?  
> **username_3**: @username_0 if the answer was sufficient and helpful, don't forget to mark it as such (answered).  

---

