Inflation and the job market

Date posted: April 2, 2014

We need more jobs in this country, yet most of us also would like low inflation, says host Mary Walden, adding that there’s a theory in economics suggesting that higher inflation would actually create more jobs.  She asks her husband, economist Mike Walden, How so?

Mike Walden, “Mary, this is one of those ideas that I think when it’s stated, people scratch their head and say ‘how can economists come up with that notion?’  It sounds so silly. But let me give you the core rationale behind the notion that if we had more inflation, maybe we could have more jobs. One is based on the buying behavior of people. If people perceive that inflation is rising and is getting higher, they’re likely to be motivated to buy now to beat tomorrow’s prices.

“So, if people buy now, obviously that’s going to create more business for firms and they will have to add jobs. So at least for a while you may have more jobs. Now, the second reason is a little murkier, and what it essentially says is if we have a rise in inflation, business revenues are going to rise. Therefore, businesses are going to want to produce more.  Also, if inflation is rising and businesses pay their workers the same wage, what that means is that in inflation-adjusted terms the wage rate paid actually goes down.  Therefore, businesses will want to hire more workers.

“This theory really works on the basis of workers being fooled. They only look at their wage rate pay, but they don’t really look at what that wage rate really buys in terms of after inflation purchasing power. So, these are the reasons behind this notion. The Federal Reserve perhaps has been nudging a little bit in that direction, but I don’t think these are theories that are really going to take hold because most people think they sound actually fairly bizarre.”

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