How Inappropriate General Wage Levels and Wage Inflation Can Cause Increased Unemployment - Assignment Example

 How Inappropriate General Wage Levels and Wage Inflation Can Cause Increased Unemployment This assignment aims at analyzing the impact of general wage levels and wage inflation towards the upside of unemployment. In this discussion, the influence of Unit Labor Costs, Real Unit Labor Costs and Relative Wages on employment and unemployment would also be discussed and analyzed. The most interesting aspect of economics is its ability to twist and turn relationship amongst different economic variables. Unemployment is often considered as a disease in the society; its major impact is the fact that the productivity that can be obtained by employing the unemployed resources is foregone. Additionally, it adds poverty to the society, frustration to the individuals, and more often than not, the symptoms of unemployment can be observed by tracking crime rate as it often creeps up. There are several reasons for unemployment, however, in the current economic situation; recession can be identified as the ‘hottest’ reason. Recession not just leads to unemployment in the short run but has long term negativity associated to the same, by the due fact that individuals lose their interest in gaining relevant skills for a job, and subsequently, when recovery takes place and demand of the labor moves up, but lack of appropriately required skill set makes it difficult for employment levels to move up, and thus, recovery becomes very slow (Blanchard, 2008). Inflation, as simply defined as an increase in general price levels, is also a critical aspect of economy, and is an important economic indicator. Despite the fact that inflation illustrates the growth of an economy, at the same time, this variable needs to be retained within certain limits because exceeding a certain value would imply excessive increasing prices, putting pressure on consumer pockets, and not allowing them to retain their standard of living, let alone increasing them. Inflation is influenced by various economic elements such as various input costs, depreciating local currency, etc, while it also affects other economic elements at the same time (Nellis, 2006). The following sections analyze how inappropriate labor costs influence the inflation in an economy. Influence of Unit Labor Costs Unit labor cost is defined as a ratio between average money wage and average labor productivity. The formula looks like as follows: Unit Labor Cost = Average Money Wage / Average Labor Productivity = W / (Y/E) Consider a scenario in which average wage is on the greater side, then as per the above equation, the unit labor cost would be on the higher side as well. Following this scenario, it can be assumed that the producer would have to increase the price of the output to ensure profit margins remaining at the past numbers, if not moving ahead that is. Increasing price would lead to inflation, and would definitely embark that these is loss of international competitiveness from the producer’s side; this would in-turn imply that unemployment would prevail in the import and export competing industries. Additionally, the government would definitely take measures and develop policies for countering this inflationary impact, and such policies would definitely be contractionary in nature (Sloman, 2006). This is a prime example of how unit labor cost and inappropriate wage levels would lead to inflationary impact and unemployment. Influence of Real Unit Labor Costs Real unit labor cost is defined as the ratio of unit labor cost to the factor of ‘P’, which can be defined as: a. Index of consumer prices in case of real wage as income to workers b. Index of domestic producer prices in case of real wage as cost to production The formula for deriving the real unit labor cost can be stated as: Real Unit Labor Cost = Unit Labor Cost x Price Index = (W/P) / (Y/E) = W.E / P.Y This can also be termed as ‘Wage Share of Aggregate Income’ i.e. the share of the total income that attributes towards the wages. It can be concluded from this definition that an increasing wage share leads to reduced profitability of a firm. From the laws of economics, it is known that when profitability of a firm reduces, the investor loses their confidence and withdraws their investments, and such a scenario would also reduce the productivity, and once the productivity declines, there would be firing of workers, thus, unemployment (Todaro, 2008). This case also presents a classical scenario of how inappropriate wage levels influence unemployment through the context of real unit labor costs. Influence of Relative Wages Relative wages imply the ratio of relativity and can be amongst variables based on differentiation of gender (male/female), age brackets (youth/adult) or can be labor vs. capital. Relative employment growth (such as growing number of female employees to male employees) illustrates the industry composition in terms of gender representation. Age bracket relativity depicts substitution impact, while labor vs. capital substitution shows advances in prices for either. Essentially, these tend to illustrate an incrementing trend towards inappropriate wages because replacement is fundamentally expensive than the variable existing to be replaced. Subsequently, cost of production would rise; increasing the final cost of output, and price increase would be the bottom-line, enhancing inflations (Sloman, 2006). This relates to another case of inappropriate wage levels leading to inflation in the light of relative wages. Conclusion Economics is one of the trickiest subjects amongst all sciences whereby logic can link any concept to the other, theoretically as well as in practicality. Inflation and wages have always been two critical topics for economists because it is essentially important to retain them at certain appropriate levels. Inflation up to a certain degree is essential to show progress of an economy, while wages should also be maintained and incremented at regular intervals as well for adjusting the inflationary impact, and for employees/workers to retain their purchasing power and standard of living. Works Cited John Sloman, Kevin Hinde. Economics for Business 4th Edition. Pearson Education, 2006 Joseph Nellis, David Parker. Principles of Business Economics 2nd Edition. Pearson Education, 2006 Michael P. Todaro, Stephen Smith. Economic Development 10th Edition. Pearson Education, 2008 Olivier Blanchard. Macroeconomics International Version 5th Edition. Pearson Education, 2008 Read More