With the amount of changes in the labor market conditions in the past few years, it is making investors question inflation and its impact on the labor market and vice versa. Does the labor market have an impact on inflation or does inflation affect the labor market?
Inflation and the labor market are interconnected and the answer to both the questions is yes. We can go deeper into the details to understand what is happening as it relates to the demand and supply of labor and the economy.
When Unemployment is High How Does That Affect Inflation?
If unemployment is high, the wages remain the same since the demand for labor is low and it leaves no incentive for an employer to increase the pay. The same applies to inflation. There is no reason for prices to go up when the purchasing power is stagnant and overall spending of the economy has dropped.
However, policies do affect this to a big extent and if money is available to those who are unemployed to increase spending, it can lead to a rise in inflation. Historically, inflation does not occur in times of low unemployment.
When Inflation is High What is the Correlation to the Labor Market?
When inflation is high, you can find a much lower unemployment rate because it is associated with this correlation that there is more purchasing and lending taking place and there is a demand for higher wages from employees who are courted by companies in talent wars. This will increase the cost of doing business and will lead to higher costs and inflation.
Some studies support this while there are also studies that only partially support it. Economists like A.W. Phillips have studied and written about it for an entire century but there are also others like Milton Friedman who focus on policy implications.
Then again, historically we do see higher inflation during good economic times with low unemployment.
To conclude, the labor market and inflation are both interconnected and they have an impact on the economy as a whole. Make sure your investments are diversified to prepare for every type of economic climate that you’ll encounter in the future.
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