Unemployment and inflation: Implications for policymaking

The rate of unemployment is a dynamic measure of economic performance. Generally, with a falling rate of unemployment there occurs a growing level of gross domestic product (GDP). This occurs with higher wages and higher industrial production.

The government may normally achieve a lower rate of unemployment by means of expansionary fiscal or monetary policy. This might be assumed that policymakers would regularly aim at a lower rate of unemployment applying these policies. However, policymakers may not embark on these policies due to uncertainty on the relationship between the unemployment rate and the inflation rate. Some economists tend to agree that the rate of unemployment tends to fall to a level, while inflation tends to rise to a certain level.

In general, economists have discovered that when the rate of unemployment “falls” below a certain level, the rate of inflation will tend to “increase” and continue to rise.

On the other hand, when the rate of unemployment rises, the inflation rate will tend to slow down. When there is a general rise in wages and prices, it leads to a rise in inflation. It is the duty of a democratically elected government to conduct economic research and design macroeconomic policies that regulate wages and prices.

In Ethiopia, in the past decade, the TPLF regime had never devised policies with respect to wages and prices. It had the evil purpose of punishing the working class with inflation and low wages. This was designed to silence the labor force from demanding adjustment of wages in relation to price hikes.

The rise in unemployment creates a downward pressure on wages and prices in general leading to decreased inflation. Wages constitute a major share of the costs of goods and services. Upward or downward pressure on wages pushes average prices in the same direction. Depressing wages had only benefitted the TPLF enterprises that took advantage of their monopolistic role in the Ethiopian economy. Competing enterprises could not benefit from the unfair competition they had encountered from party businesses. They had to face pressures from labor and party businesses. There was no fair competition in the market completely dominated by the TPLF junta.

Wages were depressed in firms owned by the junta. Low wages had reduced the cost of production in the firms that had become unfairly monopolistic. With reduced costs in general, there would be low expectation of inflation. Low expectation of inflation depresses the supply of goods and services due to low prices. Consumers are forced to pay high prices for the basic goods and services they needed. Suppliers would consider expectations of inflation when they make decisions on fixing prices. Workers also affect inflation when bargaining for wages. Similarly, a change in the supply of goods and services used as inputs in the production process, impacts the final price of goods and services that change the rate of inflation.

The TPLF had crafted high rate of unemployment in Ethiopia, to discourage graduates from seeking high wage employment as skilled workers. They had been forced to engage, for example, in construction work for dismally low wages.

As a rule, wage should have been affected by changes in the demographic, educational attainment, and work experience. Wage should have also been influenced by policies, institutions, training programs and unemployment levels. However, wage was determined by the private enterprises that had been associated with the TPLF junta.

As mentioned earlier, the junta had kept wages low, while unemployment had remained high. At the same time, inflation had shown no sign of accelerating with high unemployment.

Globally, inflation was explained by the “limited” supply of finance available to businesses. With limited financing, firms could not continue with the production of goods and services, leading to insufficient supply in the face of rising demand.

Inflation expectations are formed following changes in how the governments respond to economic shocks. If governments fail to design policies to respond to these shocks, inflation is to be expected. Also, an increase in the rate of unemployment after recession would significantly decrease the bargaining power among workers. This keeps wages and prices unchanged. High unemployment forces workers to take wages as given by employers.

A falling unemployment rate or a rise in employment rate is generally a cause for joy as more individuals are employed. However, the low unemployment rate has been increasingly cited by economists as a cause for reversing back expansionary monetary and fiscal policy. After a considerable improvement in labor market conditions, governments may be “reducing” the expansionary power of their monetary policy. Any rate of unemployment is a reflection of the fact that many people are still searching for jobs and are unable to find it. So, there is no reason for any government to “reduce” the amount of stimulus, such as tax reduction, entering the economy when so many people are still looking for jobs.

In general, economists have observed an “inverse” relationship between the rate of unemployment and the rate of inflation or the rate at which prices increase. This trade-off between unemployment and inflation becomes particularly noticeable where small changes in unemployment result in relatively large price fluctuations. On the other hand, when the rate of unemployment rises, inflation will tend to slow.

In response to financial crisis, governments may employ expansionary monetary policy to speed up economic growth and improve employment opportunities. In response, the rate of unemployment may fall. If the rate of unemployment continues to fall, it may likely “cause” inflation to rise.

Economic research was necessary to understand the real situation of unemployment and inflation in the developing countries. Such endeavor had not been encouraged in Ethiopia by the TPLF functionaries, as it would have exposed the reckless economic operations of the Banda junta. Its economic growth and development operations had been focused on its place of origin to the dismay of the rest of the regions of Ethiopia.

The poor people of the country had been exposed to poverty and unemployment. As land was owned by the ruling TPLF party, people and businessmen from other regions of the country could not have enjoyed their constitutional right to access land. The Constitution had practically been revoked by the junta regarding its effective application to Ethiopians residing in different regions of the country. It was a “Fake Constitution” designed to cheat the Western Whiteman.

The Labor Law that originated from the Constitution did not apply to the junta businesses. Workers that had been engaged in these enterprises had been treated like slaves in the 21st Century. These workers had earned low wages as they could not collectively bargain for benefits as promulgated in the Labor Law.

It was again another “Fake Law” crafted to elude and evade international organization such as the ILO. This organization had never bothered to play its role in Ethiopia at the time the junta had been in power. Workers had been misrepresented by trade union leaders that had close attachment with the junta. In this situation, wages had been depressed and cost of production lowered for the junta businesses. This had distorted all aspects of the labor market. Under the junta rule, unemployment, inflation, wages and profits in Ethiopia could not have been depicted in theoretical frameworks.

Researchers in other countries, where the law of economics applied, focused on the relationship between the unemployment rate and the rate of wage inflation. Economist A. W. Phillips found that, there was a negative relationship between the unemployment rate and the rate of change in wages in the UK, showing wages tended to grow faster when the unemployment rate was lower, and vice versa. His work was then replicated in other countries, discovering a similar negative relationship between unemployment and wage growth. Economists reasoned that this relationship existed due to simple supply and demand within the labor market. As the unemployment rate decreases, the supply of unemployed workers decreases, thus employers must offer “higher” wages to attract additional employees from other firms.

Many interpreted the early research to mean that a “stable” relationship existed between unemployment and inflation. This suggested that policymakers could choose among a combination of unemployment and inflation rates. In other words, policymakers could achieve and maintain a “lower” unemployment rate if they were willing to accept a “higher” inflation rate and vice versa. This rationale was prominent decades ago, and governments considered it when designing economic policy. But, later on it was not fully accepted. Economists began challenging the concept, suggesting that it was too simplistic and the relationship would break down in the presence of “persistent” positive inflation. These critics claimed that the “static” relationship between the unemployment rate and inflation could only persist if individuals “never” adjusted their expectations around inflation.

When the unemployment rate fell, the inflation rate was expected to accelerate. When the unemployment rate rose, inflation was expected to decline. They moved in opposite directions. However, a series of negative oil supply shocks in the 1970s resulted in high unemployment and high inflation, known as “stagflation,” with inflation and unemployment rate “both” rising. The economy’s ability to produce goods and services, or potential output, was dependent on three main factors in the long run. These were the amount of capital, the number and quality of workers, and the level of technology. These factors largely represented the potential output of an economy.

In conclusion, reliable data on “unemployment and inflation” is very crucial in making policy decisions on economic issues in Ethiopia. When both unemployment and inflation are high they cause “stagflation,” which is a danger sign to the economy. Does the current war situation imply the birth of stagflation? Does demand for goods and services determine what and how much is produced in the country with domestic resources and inputs only? Are capital, labor, technology and entrepreneurship the main features of the economy or are they distorted by political and social factors that intrude in the economic performance of Ethiopia? Answering these questions honestly and apolitically helps in designing economic policy and programs that defend the country against Western and their Banda intruders, who intend to create both unemployment and inflation or stagflation in Ethiopia.

Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The



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