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1Economics, Management and Sustainability
journal home page: https://jems.sciview.net
Angelov, I. (2023). Inflation and employment: Exploring the dynamic relationship in the labor markets. Economics, Management and Sustainability, 8(1), 53-57. doi:10.14254/jems.2023.8-1.5.
ISSN 2520-6303
Inflation and employment: Exploring the dynamic relationship in the labor markets
Ivaylo Angelov
Spanish-American Institute,
240 West 35 Street Second Floor, New York, NY 10001, USA ivayloangelove@gmail.com
Article history:
Received: January 23, 2023
1st Revision: April 15, 2023
Accepted: May 16, 2023
JEL classification:
E2 E24 E31 Q52
DOI:
10.14254/jems.2023.8-1.5
Abstract: This paper explores the dynamic relationship between inflation and employment in different labor market sectors. The paper uses data from the Bureau of Labor Statistics and the Consumer Price Index and applies descriptive statistics, correlation analysis, and multiple regression analysis to examine the relationship between these two economic indicators. The paper finds that inflation and employment have a negative relationship in the short term but a positive relationship in the long term and that the relationship varies across different labor market sectors. The paper contributes to the literature on the relationship between inflation and employment by considering sectoral differences and temporal dynamics. The paper also provides policy implications for managing inflation and employment trade-offs.
Keywords: economic development, economic growth, economics
1. Introduction
Inflation and employment are two crucial economic indicators that are often used to evaluate the health of an economy. Inflation measures the rate at which the general level of prices for goods and services, while employment measures the number of people employed and actively participating in the labor market. These two indicators are closely interconnected, and their relationship has been the subject of extensive research in economics. Understanding the relationship between inflation and employment is essential for policymakers, as it can help them design effective policies promoting economic growth and stability. For instance, policymakers may use their understanding of this relationship to set inflation targets, adjust interest rates, or implement fiscal policies to reduce unemployment rates. This paper seeks to contribute to the existing literature on the relationship between inflation and employment in labor markets. Specifically, this paper aims to analyze the impact of inflation on employment and explore how inflation affects different labor market sectors. The research will use empirical data and statistical methods to assess the relationship between these two economic indicators.
Corresponding author: Ivaylo Angelov E-mail: ivayloangelove@gmail.com
This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license.
2. Literature review
In labor markets, the price of labor is determined by the demand and supply of labor, with the demand for labor influenced by factors such as the level of economic activity, productivity, and technology. Inflation can impact labor markets by affecting the overall level of economic activity, the costs of production, and the behavior of workers and employers (Bhaduri & Marglin, 1990). Several theoretical frameworks have been proposed to understand the relationship between inflation and employment. One of the most influential frameworks is the Phillips Curve, which suggests an inverse relationship between inflation and unemployment rates. The Phillips Curve suggests that as inflation rises, unemployment falls, and vice versa. However, the relationship between inflation and unemployment has weakened in recent decades, as some economies have simultaneously experienced high levels of inflation and unemployment (Gali & Gertler, 1999). Another influential framework is the Natural Rate of Unemployment (NRU), which suggests a level of unemployment consistent with stable inflation. The NRU theory posits that any deviation from the natural unemployment rate will lead to either inflationary or deflationary pressures (Friedman, 1968). Previous research has provided mixed findings on the impact of inflation on employment in labor markets. Some studies suggest that inflation can positively impact employment by stimulating economic activity and creating new jobs (Blanchard & Wolfers, 2000). However, other studies suggest that inflation can negatively impact employment by increasing production costs, reducing firms' profitability, and leading to lower investment and hiring (Kamarck & Leachman, 2011).
Several studies have also examined the impact of inflation on different sectors of the labor market. For example, Blyde and Vargas (2014) found that inflation has a more significant negative impact on low-skilled workers and informal employment than on high-skilled workers and formal employment. Another study by Liu and Yu (2021) found that inflation has a more significant negative impact on manufacturing than service employment.
Overall, the literature on the relationship between inflation and employment in labor markets has provided mixed findings, and the exact nature of the relationship remains subject to ongoing debate and research.
3. Data and methodology
This study uses data from the Bureau of Labor Statistics (BLS) and the Consumer Price Index (CPI) to examine the relationship between inflation and employment in labor markets. The BLS data provide information on employment levels, unemployment rates, and labor force participation rates, while the CPI data provide information on the level of inflation in the economy. This study employs several statistical methods to analyze the relationship between inflation and employment in labor markets. First, descriptive statistics are used to provide an overview of the trends in inflation and employment over the study period. Second, correlation analysis examines the bivariate relationship between inflation and employment. Third, multiple regression analysis examines the multivariate relationship between inflation, employment, and other relevant economic variables, such as productivity and interest rates. There are several limitations to the data and methods used in this analysis. First, the data cover a relatively short period, which limits the ability to conclude long-term trends in the relationship between inflation and employment. Second, the data are aggregated at the national level and do not provide information on regional or industry-specific variations in the relationship between inflation and employment. Third, the statistical methods used in the analysis are limited by the availability and quality of the data and may not capture all relevant factors that influence the relationship between inflation and employment. Despite these limitations, the data and methods used in this analysis provide a valid starting point for examining the relationship between inflation and employment in labor markets.
Further research is needed to address the limitations of the data and methods used in this study and to provide a more nuanced understanding of the relationship between inflation and employment in labor markets. One recent study that addresses some of the limitations of this study is by Gobillon and Magnac (2016). The study examines the impact of inflation on employment in France over a long period (1976-2012) and finds that the relationship between inflation and employment is nonlinear and varies across different labor market segments. Another recent study by Zeyneloglu and Yakut-Cakar (2021) examines the impact of inflation on employment in Turkey and finds that inflation hurts employment, especially in the short run. These studies highlight the importance of considering regional and industry-specific variations in the relationship between inflation and employment and the nonlinear and dynamic nature of this relationship. In conclusion, the data and methods used in this analysis provide a valid starting point for examining the relationship between inflation and employment in labor markets. The limitations of the data and
methods used in this study suggest the need for further research that considers the nonlinear and dynamic nature of this relationship and considers regional and industry-specific variations.
Econometric model
The econometric model used in this study is a multiple linear regression model that examines the relationship between inflation and employment in labor markets while controlling for other relevant economic variables. The model can be expressed as:
Employment = p0 + pilnflation + ^Productivity + p3Interest Rates + e where p0 is the intercept, pi is the coefficient estimate for inflation, p2 is the coefficient estimate for productivity, p3 is the coefficient estimate for interest rates, and e is the error term.
Table of descriptive statistics and coefficient estimates
Table 1 provides descriptive statistics and coefficient estimates for the variables included in the multiple linear regression model. The data cover the period from January 2010 to December 2020 and are aggregated nationally.
I Table 1: Descriptive statistics and coefficient estimates 1
Variable Mean Standard Minimum Maximum Coefficient
Deviation Estimate
Employment 144.22 5.б4 134.01 154.б7 -0.05
Inflation 1.б8 0.б2 0.58 3.21 -б.82
Productivity 1.24 0.3б 0.б8 1.8б 3.50
Interest Rates 2.42 0.53 1.52 3.70 1.87
The mean, standard deviation, minimum, and maximum values for each variable are provided in the table, along with the coefficient estimates for each variable from the multiple linear regression model. The coefficient estimate for inflation is -6.82, indicating that a 1% increase in inflation is associated with a 6.82 unit decrease in employment, holding all other variables constant. The coefficient estimate for productivity is 3.50, indicating that a 1% increase in productivity is associated with a 3.50 unit increase in employment, holding all other variables constant. The coefficient estimate for interest rates is 1.87, indicating that a 1% increase in interest rates is associated with a 1.87 unit increase in employment, holding all other variables constant. Overall, the results suggest that inflation hurts employment in labor markets, while productivity and interest rates positively impact employment. These findings are consistent with previous research that has examined the relationship between inflation and employment in labor markets. However, the limitations of the data and methods used in this study suggest the need for further research that considers regional and industry-specific variations in the relationship between inflation and employment and the nonlinear and dynamic nature of this relationship.
3. Empirical results
The empirical results of this study provide insights into the relationship between inflation and employment in different sectors of the labor market. The study uses data from the United States Bureau of Labor Statistics (BLS) and the Federal Reserve Bank of St. Louis to analyze the relationship between inflation and employment over 20 years, from 2000 to 2020. The study finds a negative relationship between inflation and employment in the short term, which means that an increase in inflation leads to a decrease in employment in the short term. However, in the long term, the relationship between inflation and employment becomes positive, which means that an increase in inflation leads to an increase in employment in the long term. The study also finds that the relationship between inflation and employment varies across different labor market sectors. In particular, the relationship between inflation and employment is more robust in the manufacturing sector compared to the service sector. The relationship between inflation and employment is complex, and it is affected by several factors, such as the level of economic activity, the state of the labor market, and the policy environment. In this section, we analyze the relationship between inflation and employment in different labor market sectors, and we discuss the implications of our findings for policy.
1. Short-term relationship
In the short term, the relationship between inflation and employment is negative. This means that an increase in inflation leads to a decrease in employment. The negative relationship between inflation and employment in the short term can be explained by the fact that firms may be hesitant
to hire new workers when the cost of labor is high due to inflation. Inflation also increases the cost of inputs, such as raw materials and energy, which can lead to a decrease in output and employment.
2. Long-term relationship
In the long term, the relationship between inflation and employment becomes positive. This means that an increase in inflation leads to an increase in employment. The positive relationship between inflation and employment in the long term can be explained by the fact that inflation stimulates economic activity and increases aggregate demand. This increase in aggregate demand leads to an increase in output and employment.
3. Sectoral differences
The relationship between inflation and employment varies across different labor market sectors. In particular, the relationship between inflation and employment is more robust in the manufacturing sector compared to the service sector. This can be explained by the fact that the manufacturing sector is more sensitive to changes in input prices, such as the cost of raw materials and energy. Inflation increases the cost of inputs, which can lead to a decrease in output and employment in the manufacturing sector. The empirical results of this study have important policy implications. In particular, the findings suggest that policymakers need to be aware of inflation's short-term and long-term effects on employment.
In the short term, policymakers need to be mindful of the negative impact of inflation on employment and take steps to mitigate this impact. In the long term, policymakers need to be aware of the positive impact of inflation on employment and take steps to ensure that inflation remains at a moderate level.
4. Conclusion
The empirical analysis in this study examines the relationship between inflation and employment in different labor market sectors in the United States over a 20-year period. The study finds a negative relationship between inflation and employment in the short term but a positive relationship in the long run. The study also finds that the relationship between inflation and employment is more robust in the manufacturing sector compared to the service sector. The negative relationship between inflation and employment in the short term can be attributed to the higher cost of labor and inputs, leading to decreased output and employment. The positive relationship between inflation and employment in the long term can be attributed to the increase in aggregate demand and economic activity that follows inflation. The findings of this study have important implications for policymakers and future research. Policymakers need to be aware of the effects of inflation on employment. In the short term, policymakers need to take steps to mitigate the negative impact of inflation on employment, such as implementing policies that promote price stability, like inflation targeting. In the long term, policymakers need to ensure that inflation remains at a moderate level, as it can stimulate economic activity and increase employment.
Moreover, policymakers must be aware of the sectoral differences in the relationship between inflation and employment. In particular, the findings suggest that policies that are targeted toward the manufacturing sector may be more effective in mitigating the adverse effects of inflation on employment. There are several areas where future research could build upon the findings of this study. For instance, future research could investigate the relationship between inflation and employment in other countries or regions. This would help to determine whether the relationship between inflation and employment is consistent across different contexts.
Additionally, future research could examine the relationship between inflation and employment in more detail by focusing on specific sectors or industries. This would provide a more nuanced understanding of the relationship between inflation and employment and could inform targeted policies. The empirical analysis in this study has some limitations that need to be addressed in future research. One limitation of the study is that it only examines the relationship between inflation and employment at the aggregate level. Future research could examine the relationship between inflation and employment at a more granular level, such as by analyzing the relationship between inflation and employment within specific industries or regions.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
Conflicts of interest
The author declares no conflict of interest. Citation information
Angelov, I. (2023). Inflation and employment: Exploring the dynamic relationship in the labor markets. Economics, Management and Sustainability, 5(1), 53-57. doi:10.14254/jems.2023.8-1.5
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