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Unemployment v/s inflation

William Philips published his controversial seminal entitled “The Relationship between
Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom” in the
London School of Economics’ journal, Economica (Philips, 1958). This work was a very
significant contribution to economic thought. In his findings, that later became “The Philips
Curve Hypothesis”, William Philips, argued that there is a strong negative relationship
between unemployment and inflation.
This tends to prove true in the case of Senegal. In 1998, the inflation rate fell from 1.75% to
1.16% leading to a rise in the unemployment rate by 0.053%. In 2003, the inflation rate was
-0.05%, but still unemployment rose by 19.6%. Phillips hypothesized that when demand for
labour low, and unemployment is high, workers are reluctant to accept lower wages than the
prevailing rate, and as a result, wage rates fall very slowly. For Senegal, demand for labour
was indeed low because of the inadequate number of jobs and unemployment was soaring.
Since wages and salaries are a major input cost for companies, the rising wages lead to higher
prices for products and services in the economy, ultimately pushing the overall inflation rate
of Senegal higher.

Unemployment v/s Economic Growth

The gross domestic product or GDP, is arguably the most important indicator on the health of
a country's economy. Different factors affect gross domestic product (GDP) and
unemployment. However, historically, a 1 percent decrease in GDP has been associated with
a slightly less than 2-percentage-point increase in the unemployment rate. This relationship is
usually referred to as Okun's law.
In 2004, Senegal’s GDP fell to 5.781% leading to a rise in unemployment of 16%.
Nevertheless, the Okun law does not apply in all the years from 1992 till 2016 for Senegal.
Unemployment in Senegal implies that the country is not efficiently using its resources to
produce output leading to a fall in GDP and ultimately a dampened economic growth rate.
Unemployment v/s interest rates
As observed Diagram 1, interest rate was the highest in 2009 whilst unemployment rate was
the second highest (10.223%) in the same period for Senegal. This evidences the fact that a
relationship exists between unemployment and interest rates. The rise in interest rates in 2009
caused an accretion in the level of savings in Senegal in the period 2010- 2011 evidenced by
Diagram 2. The rise in the level of savings further lead to a dampened aggregate demand in
Senegal causing firms to lay off workers and causing the overall unemployment rate to soar.

Diagram 1

Diagram 2