I think the answer is no. I’m sure I remember reading somewhere (possibly Hazlitt) that there is no logical connection between unemployment and inflation. But I am having trouble explaining clearly why.
My debate opponent’s point is that all other things being equal (money supply, money demand, etc), if unemployment is rising it means demand for goods is falling and hence prices will tend to fall. Ergo, potentially unemployment could rise so quickly that prices fall even with an increasing money supply.
I know there’s something wrong with this argument, but I can’t get my head round it. Anyone?
He’s assuming that the amount of goods available also remains constant. This may not be the case, especially when unemployment is rising. Also, unemployed people can still purchase goods out of whatever savings they might have.
I think it’s impossible to say. Hyperinflation happens when individuals prefer holding any other asset than money. It’s a drop in the demand of money. It can happen what you’re friend is saying, but it’s still somewhat strange. Ultimately, the fall in the value of money will outperform the fall of prices caused by unemployment.
the phillips curve trade off between price level inflation and unemployment has been evidence by empirical measures, and is a short term phenomenon. in the short term government can inflate and instigate a consumption splurge, this is destructive of the structure of production etc. but it can give employment figures a short term kick whilst the moneteray magic bamboozles businessmen into thinking times are good. when this bizarre episode is concluded you can expect unemployment to come back with a vengence and the economy has suffered.peoplle,in the medium to long term there is no tradeoff between unemployment and inflation. i would argue that inflation in the long term hampers employment, inflation in its destruction of the medium of exchange can wreck the economy, hyperinflation->lots of unemployment)
of course aside from the issue of employment there is the issue of real wages, with prospects naturally being better without inflation.
That depends on your definition of inflation. If you define inflation as an increase in prices by so many percent in one month then who knows. If you define inflation as an increase in the supply of money and/or credit then the answer is the same: Who knows? but the reason is in my opinion more correct: That is hyperinflation has nothing to do with employment and everything to do with central banking.
Analyze it in terms of supply and demand for goods.
On the demand side, rising unemployment should reduce demand. A) Those laid off will likely have less funds to spend. Of course, unemployment insurance might keep delivering them steady paychecks. B) Expectations of future employment and income may decrease, which will lead to less immediate spending.
On the supply side, less employment means less is being produced. If layoffs are confined to a particular sector, this might mean that less is produced in that sector, while other sectors reabsorb some of that capacity and actually produce more. Given that America doesn’t really manufacture a lot of its products, they probably won’t diminish in supply.
In general, employment factors will play a role, but it is unclear if they will diminish demand or supply to a greater degree. Inflationary monetary policy on the other hand will absolutely increase demand. The monetary factor is far more prevalent than the employment factor in my mind, on net for the entire economy.
No, there is no direct causal relationship between employment and inflation. The purchasing power of the dollar is determined by the supply of dollars, and the demand for dollars. Money is always in someone’s hand, and is constantly recycled. Inflation may increase employment at first as producers are seeing their revenues inflated, but once inflation stops, the structure of production must contract, and capital will be destroyed/consumed. When it contracts, if there is any wage rigidity at all, there will be massive unemployment. Indeed, history has shown that inflation and unemployment occur simultaneously quite often.
I think it’s a bit misleading to say there’s no relationship between employment and inflation. Maybe no CAUSAL relationship, where a change in one will always affect a change in the other in a definite manner; but they seem to be linked, in that they surely manipulate the psychology of buyers and the productive capacity of producers. Simply because there is no predictable pattern to their interrelation does not mean they are not related.
Combining your two answers a bit, it seems there are four ultimate determinants of the PPM:
Supply of goods
Demand for goods
Supply of money
Demand for money
Ceteris paribis, making someone unemployed will lower the supply of goods (increase prices). This is assuming that the employer chooses to spend the money previously given to the employee exactly the way the employee himself would have done. Thus there is no change in demand for goods or money.
I suppose if someone is being made unemployed, it is usually because his employer needs to save cash, so there is likely to be a shift from money being spent on consumption to money being saved in a cash balance. The decrease in demand for goods and corresponding increase in demand for money will cause prices to fall. My guess would be that in most cases, the changes on the demand side outweigh the change to the supply of goods so overall prices will fall.
They would all be overpowered by the inflated money supply however, so prices won’t actually fall but won’t rise as quickly as they otherwise would have done.
So, in summary, rising unemployment (and a fixed money supply) will tend to indirectly cause prices to fall, so will also tend to decrease/delay the rate of price inflation caused by the money inflation.
Recessions are caused by an increase in demand relative to savings and or inflation. Unemployment is the result of an increase in aggregate demand and wage rigidity. Like I said, inflation is solely determined by the supply of money and demand for money; unemployment, at least in the long run, has nothing to do with inflation.