Is High Employment Inflationary?

In Inflation is Not an Economic Condition I demonstrated that inflation has nothing to do with technology, globalization, or demographics.  What about employment?  Does high or low unemployment have any effect on inflation?

If you followed the logic of the last post, you already know the answer.  None.  Zip.  Nada.

Is there any relationship between employment and inflation?  Does the Phillips Curve exist?

There is a relationship between inflation and employment, but it’s incidental not fundamental, transient not permanent, and causality runs from inflation to employment not the other way around.  Consider what happens when the value of the dollar drops and nominal wages don’t change as quickly.  Getting paid the same number of dollars of lesser value is a wage cut.  When wages fall, all else being equal, employers can hire more workers.  Isn’t it ironic with all the hand wringing about low real wages leaving millions of workers falling behind, with continued cries for higher wages, we should have a public policy designed to reduce them?  When it comes to government we have one policy fighting the other.  Why not just keep the value of the dollar steady and skip all the confusion?

Currency devaluations work the same way since they’re just another front for depreciating a currency.  The focus of intervention is merely on the foreign exchange market, but depreciation of the currency is inflation no matter what the mechanism.  Devaluations are spun as providing a competitive trade advantage for the devaluing nation, but at root they work by reducing wages.  The workers may temporarily be more “competitive” as a result, but the same thing could have been accomplished by their taking an explicit pay cut.  Either way their aggregate standard of living benefits not an iota and ultimately depends not on monetary trickery but their ability to produce goods and services of real value.

Conversely, if the value of the currency rises but the number of currency units workers are paid doesn’t change as quickly, real wages rise.  As we know from Econ 101, artificially high prices result in surpluses, and unemployment is just another word for labor surplus.  So one of the signature manifestations of deflation is rising unemployment.  But this too is inherently temporary as people eventually learn and adapt to the changing currency value.  It would just be more economically efficient for people direct their time and effort towards producing and consuming things of value rather than waste it adapting to changing currency values in the first place, which is another way of saying zero inflation imposes the minimum economic drag.

It should be clear that employment has utterly nothing to do with inflation per se, but is an artifact of our reluctance to change the number of money units workers are paid at a pace that keeps up with changes in the value of those units.  It ‘works’ only as long as employers and employees remain ignorant of the changing value of those units or otherwise refrain from adjusting accordingly.  Or from choosing another unit for setting pay …

So as far as employment goes, it’s just a trick, and its effect lasts only as long as it takes for people to catch on.  The economic geniuses that came up with the permanent 2% inflation target either don’t know how inflation works or are engaged in deceptive marketing.

 

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