Interrelation of unemployment and inflation

The main forms in which macroeconomic instability manifests itself: unemployment and inflation, cycles.

Inflation is a depreciation of money due to the excess in the economy of the quantity of monetary units over the sum of the value of goods formed in the sphere of circulation and a certain number of banknotes that are not secured by goods. There is a correlation between unemployment and inflation, which we will consider in more detail.
As a rule, inflation is expressed, in the general increase in prices, with the falling purchasing power of the monetary unit.
An important circumstance is that, apart from total growth in value, the ratio of cost levels to one another can change, in other words, in the process of inflation, the cost of some goods can grow faster than others. Inflation, by definition, is a violation of the normal ratio of the amount of money that is circulating in the economy, as well as the mass of goods that are available on the market. With too rapidly increasing money supply in relation to the growth of the commodity mass, money depreciates and becomes less valuable. There is a steady increase in prices, which is due to excessive growth in the money supply.
One of the causes of inflation is "demand inflation." Due to a lack of capacity, production can not meet the increased demand, which leads to an increase in prices for the same volumes of commodity production. Here we can clearly see the relationship between unemployment and inflation. Although the results are not immediately apparent.
Initially, at a low total cost, there is a high level of unemployment, while a significant share of production capacity is in inactivity, an increase in demand affects positively the use of reserves and does not lead to a large increase in prices. At the next stage, as demand increases, almost full employment is recorded in the economy, while in some industries, resource stocks end, which leads to an increase in their cost, as well as a rise in wages. Inflation has already appeared, and the labor market is still narrowing, which allows for a further increase in wages. Thus, the increased costs are shifted to consumers in the form of price increases. Then the state of full employment is reached, now the enterprises are forced to hire not qualified, not so productive workers, which is reflected by additional growth of production costs and prices. There is a ubiquitous, full employment, but the economy can no longer increase the production volumes of goods, while prices are also rising.

It should be noted that at the second stage, the relationship between unemployment and inflation comes to a certain equilibrium between employment and moderate inflation.

Another reason for inflation is "cost inflation." Let us analyze the relationship between unemployment and inflation in this situation. In the economy there are situations in which employment and the volume of goods decrease with increasing prices.

In such a situation, the demand for goods and, as a consequence, for workers' hands is not at all excessive. The rise in prices causes an increase in costs per unit. Goods. Increase of costs per unit. Production at an unchanged price level leads to a reduction in output, i.e. To a reduction in the supply of goods, which determines the price increase.
Inflation of costs leads to a decrease in actual volumes of services and products, and, consequently, to an increase in unemployment.

In practice, it is rather difficult to distinguish between these two inflation without knowing its primary source, and therefore it is difficult to solve the problems of unemployment and inflation in a timely manner. But solving the problem of unemployment and inflation will contribute to the development of the economy of society.

Thus, macroeconomic instability, unemployment and inflation are much more important for the economy than it seems initially.