Business Circles, Unemployment, and Inflation
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Business Circles, Unemployment, and Inflation
A government can achieve a low inflation rate and low unemployment. In essence, a developing economy can generate more job prospects, thereby keeping the unemployment rate low. A country can achieve low unemployment and a low inflation rate through an orthodox and heterodox approach. In an economy, there is an aspect referred to as the Philips curve, which gives a trade-off between unemployment and inflation (“Low Inflation and Low Unemployment: How Can it Be? | Innovation Resource Center for Human Resources,” 1998). Hence, for a government to achieve minimal unemployment, it must bear inflation, which is not low. The aspect is also vice versa. Nevertheless, the central bank can have a target of maintaining low inflation, and this equally facilitates both low unemployment and inflation, a scenario referred to as full employment. Hence, the central bank has a double mandate because it can construct sufficient credibility, making consumers, investors, and businesses moored towards achieving the inflation target. When the central bank is non-credible, the country will have facilitated more economic shocks that will make inflation to rise beyond its expectations. Hence, the prices will increase, and since people are forecasting a higher rate of inflation, there will be a rise in the nominal wages.
The interest rates will also go up because investors will be expecting an increase in inflation. Thus, this will increase unemployment. Nonetheless, a credible central bank, the government’s market, will be confident such that any decrease or increase in the rate of inflation below or beyond the target of the central bank will be controlled back by the institution. Therefore, the occurrence of the shocks may cause inflation to rise while maintaining unemployment at a low level (“Unemployment and Inflation,” n.d.). When there is a strong expectation of inflation, the central bank may anchor this to its target, engage in monetary facilitation, and ensure a reduction in unemployment without resulting in much inflation. Hence, a government can anchor the inflation expectation and inflation through the federal reserve policies that reduce the interest rates, thereby cushioning the employment and aggregate demand (“Unemployment and Inflation,” n.d.). When an economy mitigates the unemployment and inflation, the economic growth is enhanced by the balancing financial strategies. However, the maintenance of both low unemployment and inflation may be challenging since it entails a trade-off.
The heterodox approach can also lead to the achievement of low inflation and low unemployment in an economy. The strategy looks at labor as a vital inflation source because it is composed of vulnerable to wage-price twists and production costs, which was evident in the United States of America during the 1970s (“Unemployment and Inflation,” n.d.). As mentioned earlier, there is a concept of the Philips curve. However, before this, there was a Sultan curve, which maintains a trade-off between unemployment and wage inflation. Thus, on a condition that wage restrain is assured, then the economy will subdue the inflation. Similarly, with the wage inflation controlled, the Philips curve becomes steeper, thereby leading to the pursuance of the full employment strategies, without an increase in inflation (“Unemployment and Inflation,” n.d.). The configuration leads to economic growth, low inflation, and low unemployment. Conversely, wage moderation can be done through the Rein-Meider, the coordination and centralization of wage bargaining between employer organizations, the labor unions, and the government (“Unemployment and Inflation,” n.d.). Wage moderation refers to salary increment partial to productivity growth. The state can also maintain an anti-inflationary policy to prevent threatening of wages so that the economy can achieve productive and full employment, which means there are low inflation and low unemployment. Active labor market policies also help in ensuring an economy accomplishes the same.
A government can also achieve a low rate of inflation and low unemployment due to a drop in unionism and communal bargaining. In essence, this leads to the control of rates of inflation. The decline in collective negotiations and unionism has aided in raising the wages of some employees. During a boom period, there is a short supply of skilled workers. Hence, employers give more compensations to attract these individuals (“Unemployment and Inflation,” n.d.). Therefore, this practice will increase employment opportunities, thereby leading to low unemployment. The industry can regulate salaries on their own without facing union pressures, which led to increased labor force prices. An increased wage in one sector does not affect others because collective bargaining no longer works. Typically, when salary increment affects the whole industry, unemployment may increase because many companies will strive to keep up with the cost by retrenching some employees. However, when the action only affects a single industry, other industries will still be offering job opportunities to people, thereby keeping the unemployment minimal. The lack of supply shocks in an economy is the primary cause of the maintenance of low rates of inflation. A more stable currency helps keep oil prices lower and hold down import prices (“Low Inflation and Low Unemployment: How Can it Be? | Innovation Resource Center for Human Resources,” 1998). Additionally, this subdues the rise in costs of health benefits. Thus, a government can achieve low unemployment and a low rate of inflation.
References
Low Inflation and Low Unemployment: How Can it Be? | Innovation Resource Center for Human Resources. Irc4hr.org. (1998). Retrieved 2 August 2020, from https://irc4hr.org/resource/low-inflation-and-low-unemployment-how-can-it-be/.
Unemployment and Inflation. Www2.harpercollege.edu. Retrieved 2 August 2020, from http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch9-18.htm.