Unemployment And Inflation In The United States

Unemployment And Inflation In The United States

Introduction

Basic economic principles have played an immense role in guiding economic policies both at the national and state level. This is especially with regard to unemployment and its relationship with inflation. Needless to say, unemployment has been one of the most fundamental issues in the country. Indeed, it comes up as one of the hottest topics even in the political arena. Scholars have always come up with explanations for the relationship between inflation and unemployment. More often than not, unemployment is associated with the actions of the national government without proper examination on the dynamics within the specific industries. These are the dynamics that are examined in the article “Unemployment and Inflation in the United States” by Alexander Koscinch.

In July 2011, the national unemployment rate reduced by a meager 0.1% after an additional 117,000 new jobs, taking the rate to 9.1%. Every new vacancy gets at least three applications for employment, with hardworking individuals finding it extremely difficult to retain their jobs as lay-offs increase by the day (Koscinch, 2011). Alexander blames the increased unemployment rate to market failure stating that in instances where business entities are unable to sell their products they are forced to reduce expenditure, lay off workers, as well as reduce production to ensure sustainability (Koscinch, 2011). On the same note, an increase in the wages and salaries results in an increase in the cost of production, which results in an increase in cost of the product. In essence, Alexander underlines the importance of keeping inflation low so as to increase economic growth, noting that the price of products increase when the dollar value is depreciated by the inflation.

While quite a number of brilliant ideas are espoused in the article, it is imperative that the relationships underlined and the solutions put forward are examined. First, Alexander is right on the fact that the price of products goes high in instances where the dollar value is depreciated by inflation. However, questions arise as to whether the solution rests on keeping the inflation low.

The relationship between inflation and unemployment was explained using the Philips curve. This theory underlines the notion that an increase in the number of people who are working would result in an increase in the national output, resulting in an increase in the wages. This means that customers would have more disposable income, in which case there would be an increase in demand for goods and services (Cobham, 2010). Consequently, there would be an increase in the price of goods and services. In essence, the Phillips curve indicated that inflation and unemployment have an inverse relationship where an increase in inflation resulted in a decrease in unemployment and vice versa (Cobham, 2010). It is worth noting that the two fundamental objectives of economic policy makers remains keeping both unemployment and inflation low. This means that policy makers must carry out a tradeoff between the two variables (Cobham, 2010). A large number of policies that are used in lowering unemployment such as those used in recessions come with the risk of increasing the inflation level. Policies aimed at lowering inflation, on the other hand, would potentially increase the rate of unemployment, for example the adjustment of the national interest rate. A reduction in interest rate results in expansion of businesses, causing more employees to be hired and resulting in increased money supply and inflation (Cobham, 2010). In essence, it is imperative that policy makers determine the appropriate inflation rate that would keep unemployment rate at a minimum.

References

Koscinch, A (2011). Unemployment and Inflation in the United States. Examiner.com retrieved HYPERLINK “http://www.examiner.com/article/unemployment-and-inflation-the-united-states” http://www.examiner.com/article/unemployment-and-inflation-the-united-states

Cobham, D. P. (2010). Twenty years of inflation targeting: Lessons learned and future prospects. New York: Cambridge University Press.