Inflation and full employment
June 18th, 2009 | Published in Economics idea
If a market economy is close to full employment, sellers get too much power.
Sellers of labor – those looking for work – are in a strong position to demand higher wages. With the labor market tight, employers have a hard time finding appropriate candidates. Job seekers know this and hold out for higher wages.
Sellers of goods and services are in a strong position to set higher prices too. They may be having trouble expanding capacity because they can’t find more workers. If they can’t produce more, there isn’t much to be lost from driving away a few customers with higher prices. Price increases make sense.
When sellers have more power than buyers, the result in a market economy is increasing inflation. I can’t think of any mechanism that can be used in the context of a market economy to strengthen the position of buyers when unemployment is very low.
Since spiraling inflation is unacceptable, full employment in a market economy is impossible. The price of having individuals freely set prices is persistent unemployment.
