Interplay Between Inflation And Work

Interplay Between Inflation and Work

Introduction:

In this paper I analyse an article from the times dated February 5th 2007, the article is by Graham Searjeant and the title is the interplay between inflation and work. Unemployment can be defined as the number of people in the economy who are willing to work but cannot find a job, the rate of unemployment is measured by getting the number of people in the economy that are jobless and are between the age of 16 to 65 years and this is divided by the total number of working force in the economy. inflation on the other hand can be defined as the consistent rise in price for a prolonged period of time in the economy, this rise in price include all the goods and services in the economy and in most cases inflation will lead to a recession in the economy.

The Phillips curve is a theoretical perspective of the relationship that exist between inflation and unemployment, the Phillips curve depict that when inflation rises then the rate of employment is high and if inflation is low in the economy then the rate of employment is low in the economy.

Keynes on the other hand tried to explain the causes of inflation as cost push and demand pull, regarding cost push the inflation is caused by the increase in wage rate in the economy. Demand pull inflation is as a result of increased demand which exceeds the aggregate supply.

Work and inflation:

According to this article inflation is caused by the high demand for money that exceeds the supply level of goods and services in the economy, the author also states that inflation is caused by a rise in the price of oil, this is called oil shock inflation, in this case because oil is an input indirectly or indirectly for every industry and production process, a rise in the oil prices therefore will lead into an increase in prices which in this case is inflation.

Interplay Between Inflation and Work

The other form of inflation is evident where the labour force bargain for higher wage rates, the higher wage rates will lead into higher costs of production and this will also result into inflation, for this case therefore inflation is caused by high wage rates and this is what Keynes referred to as cost push inflation.

Nairu is the non acceleration inflation rate of unemployment. Nairu has fallen as a result of inflation expectations in the UK. Nairu has been used by the government for the purpose of policy, for this reason therefore the government will check and balance unemployment and inflation because as the Phillips curve depict as the rate of inflation rises then the rate of unemployment will decrease.

According to the Phillips curve employment and inflation are related in that when the rate of inflation increases then the rate of employment will also increase, when inflation decreases then the Phillips curve depict that the level of employment in the economy will also decrease. Below is the Phillips curve:

From the above diagram when inflation is high then the rate of unemployment is low and when the inflation level is low then the rate of unemployment is high.

Immigration into the UK has resulted into a faster economic growth with low inflation. This due to the increase in the level of skilled labour which has resulted into a reduction in deficiency of labour and for this reason the economy has grown with low inflation rate. However the high levels of skilled labour due to immigration has not solved the problem of low investment in the UK.

According to this article therefore high employment levels will lead to higher inflation levels and this is consistent with the Phillips curve, higher employment will also lead to higher marginal propensity to consume and also marginal propensity to save and as a result there will be higher

Interplay Between Inflation and Work

levels of economic growth.

Nairu which is the non acceleration inflation rate for unemployment has been used for the purpose of policy making for the purpose of increasing the rate of employment without affecting the level of inflation. Therefore the government policies have to be made with a consideration of the negative effects policy have on the economy. If a government wants to increase employment then there is need to take into consideration the negative consequence of this which is high inflation rates.

References:

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Press, New York

Interplay Between Inflation and Work