The same headline can arise from different economic mechanisms.
A good diagnosis identifies the outcome, uses evidence to explain the cause, then traces consequences for households, firms, government and future productive capacity. Separate demand weakness from supply constraints, job mismatch from ordinary search, and disinflation from falling prices. More than one mechanism can operate at once. Prioritise evidence that could change the diagnosis, such as capacity utilisation, vacancies by occupation, input costs or group real incomes. This prepares a policy judgement, but an issue label alone does not establish which policy will work or how large its effect will be.
- Outcome
- Identify exactly what the reported indicator measures and over what period.
- Mechanism
- Connect evidence to demand, supply, matching or distribution rather than assuming a cause.
- Consequences
- Trace effects on households, firms or government. Distinguish an immediate loss, such as lower earnings, from a lasting effect, such as skills weakening after a long period without work.
Connect each claim to its evidence
Mixed causes
Several unemployment and inflation mechanisms can coexist across sectors.
Next evidence
Choose information that could change the diagnosis, such as vacancies by skill, input prices or spending plans.
Policy boundary
The next chapter compares responses. Correct diagnosis is necessary but does not guarantee policy effectiveness.
Worked example: An energy shock and hard-to-fill vacancies
Output growth is weak, general prices rise, manufacturing vacancies fall, and specialist technical vacancies remain difficult to fill. Imported energy costs have increased. No information is given about household confidence or investment plans.
- The energy-cost evidence supports an adverse AS channel that can produce weaker output and upward price pressure together.
- Declining manufacturing vacancies may reflect reduced labour demand, but specialised unfilled jobs also suggest potential mismatch. The two mechanisms can coexist.
- Households may face weaker job prospects and higher costs, while firms face squeezed margins or lower sales; exact effects depend on wages, pricing and exposure.
- Further evidence on broad expenditure, skill requirements and spare capacity would help distinguish additional demand weakness from the supply shock. Avoid assuming one headline explains every sector.
Watch out for this
One type of unemployment or one inflation cause must explain the entire economy at a time.
Different sectors and agents can face different mechanisms simultaneously. Use evidence to identify the important channels.
Check your understanding
Which is the strongest next step after observing weak growth and high inflation?
- Assume there is only excess AD without checking costs or capacity.
- Inspect input costs, capacity and spending changes before choosing the dominant explanation.
- Ignore the evidence because models have assumptions.