Inflation and Unemployment Essay Example for Free

Inflation and Unemployment Essay Recently, the United States of America has been bombarded with a great financial crisis. Many companies resulted to bankruptcy forcing the owners to close their businesses. Other companies had lay-off some workers to lessen the operating costs of their business. Few other companies resulted to cutting the employee’s benefits to avoid laying-off and closure. Workers earning below marginal income resigned from their job in the hope that they could find another job which pays better. Among these responses, the most notable problem is the increase in the rate of unemployment. In a report from Bureau of Labor Statistics (2009) among the 2,309 population in Iowa only 1,602 are employed while 62 are jobless in 2007. In 2008, from 2,325 members of the population, 1,607 are employed while 69 are jobless. Measuring the employment-population ratio of Iowa residents aged 16 years and above, the rate of unemployment was at 69. 4 percent in 2007 and 69. 1 percent in 2008 (U. S. Bureau of Labor Statistics, 2009). Meanwhile, the U. S. Bureau of Labor Statistics (2009) reported that the unemployment rate in Waterloo-Cedar Falls Metropolitan Area rose at 8 percent in February 2009 whereas the jobless rate was recorded at 4. 9 percent. This is relatively high as compared to unemployment rate in 2008 which was at 3. 9 percent and in 2007 which was at 3. 7 percent (U. S. Bureau of Labor Statistics, 2009). State inflation has been identified as one of the major factors that contributed to the increased number of the unemployed. Inflation refers to â€Å"a process in which the average level of prices increases at a substantial rate over a considerable period of time† (Grolier Encyclopedia, 1995, 150). This implies that more money is needed to buy a certain amount of products and services. In Keynesian term, the relationship of inflation and unemployment has been described as: Wage costs are among the costs that rise in response to higher pries. When unemployment is low, employees can old out for full compensation for the higher prices, and raises above that. When unemployment is high, however, the employees will have to settle for less, and so costs do not rise as fast as prices when unemployment is high. (cited in Inflation and Unemployment). Adopting this term in the case of Waterloo-Cedar Falls, the high price of goods and services lead to increase in the number of unemployment since the companies are forced to cut down their human resources to adapt to the increasing prices of goods and services that caused high costs in production. There are also times in Waterloo-Cedar Falls when high unemployment caused high inflation yet the production cost did not increase as fast as the prices. In this situation, high employment is caused by low labor wage. Since the wage is low, the demand for product and services is also low forcing the companies to increase their prices in order to compensate for the low demand of products and services. Analyzing the relationship between inflation and unemployment the following factors are said to contribute to the increase or decrease of the two variables: wage as part of production costs, level of demands and supply, and cost of goods and services. Depending on the movement or behavior of these factors, the level of inflation or unemployment will either increase or decrease. Yet, it does not always follow that when unemployment is high; inflation is also high or vice versa. There are other instances when unemployment is low yet the level of inflation is high or vice versa. Again the increase or decrease in level of the two variables depends on the above mentioned contributing factors. The Waterloo-Cedar Falls, however, tried to address the problems of inflation and unemployment by creating job opportunities for its residents. As expressed by Bob Seymour, Cedar Falls community services manager and economic development director, in an interview by Jim Offner (2009)† â€Å"Obviously, we’re not immune to what’s going on nationally, but we’re pleased that we’ve been able to see some expansion and new-project interest in Cedar Falls right now. The university obviously keeps us on an even keel, and I think our business community has learned to be more diversified and in a better position to weather these down times. Projects like Target Corp. ’s new perishables distribution warehouse and retail developments in Cedar Falls also are helping the city withstand national trends. † (cited in Offner, 2009). This solution however is applicable only for a short period of time. To really solve the problem of inflation and unemployment, Waterloo-Cedar Falls should implement a demand managing policy wherein the government and private sectors will be required to learn how to manage demands in supply (both of labor and product materials) and demands in product and services according to economic situation. Such management is needed so that the people of Waterloo-Cedar Falls will be trained to expect the worst consequences of increase or decrease level of inflation and unemployment. References Grolier Encyclopedia. (1995). Inflation. In U. S. Grolier Encyclopedia of Knowledge 10, 150. USA: Grolier Incorporated. Mc Cain R. A. 2009. Inflation and Unemployment. Retrieved April 24, 2009 from http://william-king. www. drexel. edu/top/prin/txt/AS/where1. html Offner, J. (2009). Local jobless rates among best in state. Retrived April 24, 2009 from http://www. wcfcourier. com/articles/2009/03/11/news/breaking_news/doc49b7a3bf91f75482515049. txt U. S. Bureau of Labor Statistics. (2009a). Over-the-year change in unemployment rates for Metropolitan Areas: Monthly rankings, not seasonally adjusted. Retrieved April 24, 2009 from http://www. bls. gov/web/laummtch. htm. U. S. Bureau of Labor Statistics. (2009b). Regional state and unemployment, 2008 annual averages. Retrieved April 24, 2009 from www. bls. gov/news. release/pdf/srgune. pdf.