inflation and employment
Editorial
Inflation,
Employment and Money by Fred E. Foldvary, Senior Editor
The economy of the United States is booming, and wages are starting to rise. Many economists fear that wage increases will push prices up, and that this inflation should be stopped. The way inflation is typically dealt with is to raise interest rates to reduce investment, slow down the growth of the economy, and so hold down that nasty inflation. If that reduces employment, the conventional thought goes, that's the price of reducing inflation, as inflation is worse in the long run. Economists have a name for the relationship between unemployment and inflation, the "Phillips
Curve," named after an economist who found a connection between wage increases and unemployment. When unemployment is low, wages tend to rise faster than when unemployment is high. This is evident, but there is a problem when policymakers try to use this relationship to reduce inflation.
First of all, there are two types of inflation, monetary inflation and price inflation. Monetary inflation is a toohigh growth in the money supply. Price inflation is a continuing increase in prices. Monetary inflation causes price inflation, but price inflation can be caused by other economic forces. As productivity increases and labor becomes in short supply in some fields, some wages will rise, and this is not an economic problem. Why not have labor get its share of prosperity? Wage increases today are no cause for alarm. Profits have been high, rents are increasing, and labor is due its share of the wealth. If wage increases are due to shortages of labor, that by itself is not priceinflationary in the long run, since this signals that workers should enter the fields
where
Inflation,
Employment and Money by Fred E. Foldvary, Senior Editor
The economy of the United States is booming, and wages are starting to rise. Many economists fear that wage increases will push prices up, and that this inflation should be stopped. The way inflation is typically dealt with is to raise interest rates to reduce investment, slow down the growth of the economy, and so hold down that nasty inflation. If that reduces employment, the conventional thought goes, that's the price of reducing inflation, as inflation is worse in the long run. Economists have a name for the relationship between unemployment and inflation, the "Phillips
Curve," named after an economist who found a connection between wage increases and unemployment. When unemployment is low, wages tend to rise faster than when unemployment is high. This is evident, but there is a problem when policymakers try to use this relationship to reduce inflation.
First of all, there are two types of inflation, monetary inflation and price inflation. Monetary inflation is a toohigh growth in the money supply. Price inflation is a continuing increase in prices. Monetary inflation causes price inflation, but price inflation can be caused by other economic forces. As productivity increases and labor becomes in short supply in some fields, some wages will rise, and this is not an economic problem. Why not have labor get its share of prosperity? Wage increases today are no cause for alarm. Profits have been high, rents are increasing, and labor is due its share of the wealth. If wage increases are due to shortages of labor, that by itself is not priceinflationary in the long run, since this signals that workers should enter the fields
where