How Inflation and Unemployment Are Related

The relationship between inflation and unemployment has traditionally been an inverse correlation. However, this relationship is more complicated than it appears at first glance, and it has broken down on a number of occasions over the past 50 years. 1 Since inflation and employment (and unemployment) are some of the most closely monitored economic indicators, we'll delve into their relationship and how they affect the overall economy. When unemployment is high, the number of people looking for work significantly exceeds the number of jobs available. In other words, the supply of labor is greater than the demand for it. Let's take wage inflation—the rate of change in wages—as a proxy for inflation in the economy. With so many workers available, there's little need for employers to "bid" for the services of employees by paying them higher wages. In times of high unemployment, wages typically remain stagnant, and wage inflation (or rising wages) is non-existent. 2 In times of low unemplo

The relationship between inflation and unemployment has traditionally been an inverse correlation. However, this relationship is more complicated than it appears at first glance, and it has broken down on a number of occasions over the past 50 years. 1 Since inflation and employment (and unemployment) are some of the most closely monitored economic indicators, we'll delve into their relationship and how they affect the overall economy. When unemployment is high, the number of people looking for work significantly exceeds the number of jobs available. In other words, the supply of labor is grea