Inflation refers to an increase in prices. Some economists believe inflation and employment have an inverse relationship -- when one goes up, the other goes down. The notion that we must tolerate higher prices if we want more jobs is not as widely held as it once was, says a Congressional Research Service report in Cornell University's digital commons. Though some ideas are changing, the effects that inflation has on employment remains in question.
Economy, Employment and Inflation
According to Harper College, when the economy is growing, business activity increases, and firms increase production and hiring. Unemployment falls and inflation rises as businesses must spend more on labor and more people have money to compete for goods and services. When the economy contracts, business activity declines. Unemployment rises because there's less demand for labor, and inflation declines as businesses' costs and competition for their goods and services decrease.
Types of Inflation
The varying types of inflation create a challenge in outlining a specific relationship between inflation and employment. Cost-push inflation is caused by supply reductions. It has a contractionary effect on the economy and results in less output. Demand-pull inflation occurs when spending exceeds production, and it has an expansionary effect on the economy as output increases. Hyperinflation describes an extremely negative situation in which prices rise rapidly and money's value quickly erodes. Society doesn't benefit because people do not want to spend, and businesses don't want to accept a rapidly weakening currency anyway.
The Federal Reserve
In the U.S., the Federal Reserve has a dual mandate to create stable prices and maximum employment. A recession in late 2007 caused high unemployment and low inflation. In 2008, the Fed started using nontraditional measures to promote growth and create jobs. Those measures inject the financial system with additional money from the Federal Reserve. Unemployment declined somewhat but remains a major problem. Meanwhile, inflation continues to be lower than desired.
Another challenge in outlining the relationship between inflation and employment is that inflation responds slowly to economic influences. The Federal Reserve's tactics are widely criticized because it admits that the long-term effects of its actions are unknown. Many are concerned that inflation will occur while unemployment is still high. That, they say, could produce serious ongoing problems.
Inflation and persistently high unemployment can reduce long-term growth. The risks of unemployed people becoming unemployable or leaving the labor force increase, and young workers getting their first permanent jobs will likely have lower lifetime incomes, says the Fiscal Times.
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