why does low unemployment cause inflation?
In: 6
you can check out the phillips curve theory of the inverse relation between inflation and unemployment
In terms of being a primary contributor, its very far down the list.
Employment is not a good way to look at inflation because more labor would create more supply. Less labor would create less demand. But there is always a temptation to blame the labor market for corporate greed.
Market consolidation, price manipulation, and supply shortages are the primary driver of inflation.
Low unemployment means jobs need to compete to get workers. This means they increase wages to attract workers. Increased wages means increased cost for the company, so the goods that company produces increase in price as well. Inflation.
ELI5 is “Too much money chasing too few goods.”
The “too much money” part comes from just about everyone having a job, and therefore money to spend i.e. demand is high.
The “too few goods” part comes from businesses having trouble expanding because there are not enough people looking for work i.e. supply is constrained.
High demand plus constrained supply equals rising prices i.e. inflation.
In the real world, the situation is far more complicated. But you asked for ELI5, so… 🤷♂️
When the job market is good, people are willing to take out loans for stuff like houses and cars. Or a loan to try to start their own business. Or whatever. The point is they take out a loan. Loans have interest. Interest causes inflation.
To put it real simply, Let’s say there’s only $1000 in existence. You take out a loan for $100. You have a 10% APR. One year later you pay back $110. Where did that $10 come from? You got it from working or something sure, but it had to originate somewhere. Now there’s $1010 floating around. Well, that $10 came from the government, either through wages to government employees who then paid for something. Or through government contracts to other businesses.
Interest creates inflation. So when lending is high (and it was historically high the last 5 years) then inflation will be high. We just wont notice for a little while.
If a business can’t find workers, they have to pay more in order to hire. The fast food spot who can’t staff their restaurant paying $12/hr has to raise their pay to $15/hr. But those higher wages mean higher operating costs, so a business has to raise prices to compensate.
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