Inflation v/s Unemployment

Price stability and full employment are two of the most important and intricately linked macro-economic objectives of any government. As the name suggests “price stability” means that the prices of commodities in a society remain almost constant, thereby not affecting the purchasing power of individuals. “Inflation” on the other hand is the continuous and persistent rise of prices over a period of time, which causes a downfall in the value for money.

Every economy is sure to have an equilibrium level of unemployment, because of job mismatch and / or disproportionate share of job openings to job seekers. When looking at unemployment and inflation on a short-term basis, they appear to have a rough inverse correlation, coined as the “Philip’s curve”. That is, the higher the rate of inflation. The lower the rate of unemployment would be, and vice versa. In such a scenario, it is quite difficult for regulators to limit them both. However, it is to be realised that in the long run, there is not much of a correlation between unemployment and inflation, as there would always be a fixed rate of unemployment, irrespective of the status of inflation.

How then, can one determine whether it is more important to control inflation or unemployment? Research show that the least educated and the old are more concerned about unemployment than inflation, whereas the youth and the most educated are more concerned about inflation. It is also to be noted that, for many years now, social scientists have been studying about the relation between employment and mental health. And it has been proven that unemployment even leads to suicidal behaviour and government unpopularity. The simple ways in which the government can try to control unemployment is to cut taxes and promote the growth of small business. However, as mentioned earlier, no action of the government can completely eradicate unemployment. Take in to consideration, a home-company which decides to shift their business overseas on account of cheap labour or technological advancements. This will definitely lead to a rift in the employment sector of the home country. The government, however mighty, cannot implement any direct action to restrict this. On the other hand, through money supply and interest rate, the government can influence inflation rate. It must also be realised that when there is a high inflation, regardless of being employed, people will have lower purchasing power, as their salaries remains constant.

Hence, in my considered opinion, instead of trying to provide employment for its entire people, the government should try to increase the value of their money and reduce the money for the goods.