There’s been some buzz about the unemployment rate lately in the context of inflation, with the low unemployment rate blamed, in some communications, for the current inflation crisis. The architecture of these arguments sometimes implies the blame unintentionally—some are trying to say, “Hey, if we do these things to lower inflation, they’ll also cause unemployment to rise,” and it’s coming out closer to, “We need to raise unemployment.” Some, though, really are saying the latter, and that isn’t the worst thing in the world to say.
One consequence of economics not being part of our most basic education is that it’s hard to know exactly what things like “unemployment” mean in the large-scale sense. We know, of course, what they mean in the personal sense. Even those few of us who haven’t personally known someone out of work can understand the concept of losing a job. But there’s an understandable tendency to apply this narrow, personally cataclysmic definition to all unemployment, and that’s where a problem arises. Because while that certainly is one part of unemployment, there is also a large, natural part of unemployment that is short-term and largely benign.
In even a wonderfully healthy American economy, something like one in every 20 or 25 people will be unemployed at any given moment. These are people who, as our unemployment rate is defined, are not actively employed but have undertaken actions in the last four weeks that qualify as an active job search. A laid-off factory worker qualifies, but so, briefly, did my wife earlier this month, when she left her job at a mental health clinic and sought a new job. The four or five percent of the labor force that is unemployed at any given time are not the same people, week-over-week. People transition out of jobs, people transition into new jobs, those people are covered in part by unemployment insurance while out of work, this is a natural phenomenon in even the healthiest economy. Long-term unemployment is a different beast, and is something to avoid, but short-term unemployment, though often stressful, is a natural facet of both life and economics.
How does this tie back into inflation? Well, economists refer to this through the lens of the Phillips Curve, but the Phillips Curve is largely discredited so we’ll focus on the relevant idea. In the short term—we’re talking a few years—there is a demonstrated negative relationship between unemployment and inflation, meaning lower unemployment is tied to higher inflation, and vice versa. One explanation of this is that the harder it is for employers to find someone to take a job, the more money they’ll offer, which will then lead to a higher price on the employer’s ultimate good or service as they try to make back the money they’ve spent acquiring the employee. The same good or service will cost more money than it previously did. This is the definition of inflation.
Right now, we’re dealing with historically high inflation and historically low unemployment. Both are bad. The inflation is bad because individuals’ money is worth less than was previously the case. In instances in which wage growth doesn’t keep up with inflation, employees are effectively taking a pay cut. The low unemployment rate is bad because economic growth—the thing that makes our standard of living higher and higher over time—is hampered when would-be-growing businesses don’t have as many workers available to hire. If a business needs more labor to continue to grow and it can’t find that labor, it can’t grow, and our standard of living can’t rise. Advancements can’t be made at the degree they could be, were more workers available.
Is one causing the other? There are probably elements of that, and it’s probably true in the short term that as the federal reserve continues to raise interest rates in an effort to combat inflation (making it more valuable to save money than to spend money leads to less demand for goods and services, causing their prices to rise more slowly), unemployment will also rise (less demand for goods and services could lead to less production of goods and services, requiring fewer workers). Really, though, what’s going on can mostly be tied back to one big thing, with some of it also tied to one smaller-but-also-big-and-associated-with-the-first-thing thing.
The big thing is the pandemic. The entire globe experienced something unexpected and dramatic which affected nearly every aspect of economies, because it affected nearly every aspect of life. The effects of this shock are still rippling, and they will continue to do so for a few years. Businesses and individuals had to change how they operated, and are continuing to have to change how they operate. Put otherwise: Wild happenings lead to wild happenings.
The second thing is Russia’s invasion of Ukraine. This affects things in a more niche fashion, but any fashion appears niche in comparison to the pandemic. Fuel prices are where they are because of Russia, and fuel is involved in virtually every other aspect of the global economy, again sending out shockwaves.
What should be done? I’m not a policy wonk (I’m not an economics expert, either, but I do have a degree in it and this is fairly mainstream stuff), but all sorts of things can be done, and some of them should be done. Now would be a great time for a more navigable immigration system in the United States, as an increased labor supply would help fill the current glut of unfilled jobs without the bogeyman of risking existing workers losing their own jobs. Now might also be a good time to lower federal assistance for students wishing to attend college. It sounds harsh, but the tuition bubble is headed for a crisis if not a crisis already, and making it a better deal, comparably, to enter the work force and either forgo or delay attending college would, again, raise the labor supply while taking some air out of the tuition bubble. Now would be a phenomenal time to reexamine existing regulations, especially those unnecessarily inflating gas prices. Look up the Jones Act, for example.
Overall, though, there’s an inconvenient element here where these global shocks—the pandemic, the war in Ukraine—are just what we say they are: Shocks. They are shocks, and shocks leave ripples, and the ripples are still fanning out. In the absence of further shocks—I’m thinking especially of forceful, dramatic shocks further pulling the metaphorical economic rubber band away from stasis, necessitating an eventual return—the ripples will settle down. Inflation and unemployment will again stabilize. If policy can hasten that stabilization, great, but policymakers and—relevantly to more of us—voters must be cognizant of the risks of further shocks. Wild happenings lead to wild happenings, and the thing about the economy is that it affects everyone. If we want things to “calm down,” economically and socio-politically, we have to let them. It requires patience, and it requires those who can afford patience to offer support to those who cannot afford patience.
Inflation will cool if we let it. Unemployment will reach a natural state if we let it. Action can, and in some cases should, be taken. But that action must not be a shock in and of itself. We have enough shocks right now. That’s why we have so much inflation.
