Unemployment and Inflation - Essay Example

UNEMPLOYMENT AND INFLATION UNEMPLOYMENT AND INFLATION IntroductionUnemployment is the redundancy of the populations who are ready to work but cannot find jobs. Usually it is measured by expressing those who can work against the total work force in the economy (Gordon, & Solow, 2004). It can be caused by technology levels, lay off by organizations and when an economy is in a depression. It reduces the purchasing power of individuals hence reducing demand that negatively affects the economy.Inflation is the persistent rise in commodity prices in the economy.

It is caused when demand exceeds supply (Lindauer, 2013), when cost of productions are high that leads to high prices. During inflation the government must come up with various fiscal and monetary measures to redeem the situation.Thus unemployment and inflation are usually correlated. As the level of unemployment reduces, firms will spend more on salaries leading to high costs in production. This high costs are then passed to the final consumers in the economy inform of high price commodity generating inflationary measures in the economy (Gordon, & Solow, 2004).

While the opposite is also true. As unemployment increases, workers will demand fewer wages that will lower the production costs. This are then passed inform of low prices to the consumers leading to reduced inflation.From the intitution above, the correlation between unemployment and inflation is inverse relationship. As one increases the other reduces and vice-versa. This implies that, the economy can only achieve one at a time but not both leading to a trade off as shown below. Inflation rate 8 Philips curve L- Shaped 4 3 6 unemployment rateThe diagram above represents the trade off that exists between unemployment and inflation rate.

The economy can either do with a high inflation rate say 8% and a low unemployment rate of 3%. They can also do with a low inflation of 4% and a high unemployment rate of 6%. This is an economically proved situation in many countries and I totally agree with the correlation. Laborers always demand high wages in return for the compensation of the work they do for the company. Firms also do not have much choice since they have to hire workers if they have to produce. In the process of production they will always want recover the costs that were used in production like the wages and costs of raw materials (Gordon, & Solow, 2004).

This is passed to the final beneficiary of the commodity inform of high prices. So for firms to reduce prices they must do so in low cost of production and one way is to minimize the use of labor. These situations results into the inverse correlation between inflation and unemployment. This has been the major problem of the current economies. Population is to high that provides excess labor into the market while our economies are in slow growth. As a result the economy cannot absorb the entire labor force and only accommodates a few (Lindauer, 2013).

By doing so they can produce in low costs that does not results in inflationary measures in the economy. ReferencesGordon, R. J., & Solow, R. M. (2004). Productivity growth, inflation, and unemployment: The collected essays of Robert J. Gordon. Cambridge (UK: Cambridge University Press.Lindauer, J. (2013). The general theories of inflation, unemployment, and government deficits. Bloomigton: iUniverse.