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Updated October 27, 2020

Inverse Relationship Between Unemployment And Inflation

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Inverse Relationship Between Unemployment And Inflation essay
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Firstly, the positive impact of the increase in production cost is that it will cause a reduction in the unemployment rate of a country. Cost-push inflation is a situation occurs when the overall price levels rise due to increases in the production costs such as wages, rents, utilities and raw material. The increased price of the factors of production leads to a decreased in aggregate supply which represents the amount of total production in the economy, this will make the prices rise in the finished goods or services if demand remains the same (Kenton, 2018). According to Phillips (1958), there is an inverse relationship between unemployment and inflation of a country. Thus, a country will have the available options of between having a combination of low inflation and high unemployment or vice versa (Furuoka,2007).

Based on the statistics derived, Malaysia’s inflation rate increased from the year 2016 to the year 2017 which from 2.08% to 3.8% while the unemployment rates reduced from 3.44% to 3.42% (Refer figure 1.1). There is a reduction in the unemployment rate in Malaysia, this is because an increase in inflation results in an increase in job opportunity and thus indirectly decreasing unemployment. When unemployment is low, businesses have to compete for more for workers and forcing wages to rise up. Higher wages increase the production cost, which businesses will counter with higher prices and cause high inflation. In 2018, the government has announced that the minimum wage is raised to RM1,100 nationwide from Jan 1, 2019 (Ramasamy,2018). A higher wage will cause an increase in the supply of labour, so it would be easy for people to get a job and thus reduce the unemployment rate in Malaysia. By contrast, when unemployment is high, the surplus of labour supply would push down the wages and thus result in a lower inflation rate in the country. It would be hard for people to get a job and unemployment would be increased in the situation (Phillips, 1958).

On the other hand, the increase of production cost also had given the same effect to Singapore as in Malaysia. In 2017, Singapore’s inflation rate increase to 0.58% compared to the previous year and the indirect positive impact is that there is a reduction in the unemployment rate in Singapore (refer figure 1.2). Singapore’s unemployment rate was 2.1% in the third quarter which had reduced from 2.2 % of the second quarter (refer figure 1.2). Besides, the Ministry of Manpower stated that the high levels of job losses in the year of 2016 appear to have abated.

Retrenchments in the third quarter had fallen marginally to 3,600 from 3,640 and the decline was due to fewer layoffs in the manufacturing sector. MOM had highlighted job opportunities in five priority sectors which include infocomms and media, finance and insurance, healthcare, professional services and wholesale trade, this had encouraged more job support to be developed for these areas, for example, professional conversion programmes to help mid-career workers gain skills for new jobs (Seow,2017). Hence, this had lead to a reduction in the unemployment rate for Singapore. In short, an increase in the production cost which causes inflation has given an indirect positive impact on Malaysia and Singapore in term of reduction of the unemployment rate.

Inverse Relationship Between Unemployment And Inflation essay

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