Most people are surprised to hear that reducing inflation requires increasing unemployment. If we listen to this approach in bad faith, it is quite likely that we will misinterpret the spirit of what has been said because we do not understand the context. The “inhumane” nature of such an approach is usually cause for outrage. And, in fact, it is not uncommon to find content of this type on social networks. According to these warriors for justice, what the elite really wants is to increase poverty to further enrich their pockets.
We well know that the “conspiratorial” tone, using a scheme of -them against us-, is our daily bread on social networks. In this war, there are only friends and enemies. Are you with me or are you against me? Friends are always innocent. Enemies are always guilty. There is no reconciliation possible. There are no meeting places. The enemy is deceitful, dishonest, and evil. Always.
Who is the enemy? The Government, the central banks, the private banks, the corporations, the press, Hollywood, the rich, the universities, the experts and all those who do not think like me. Who are the friends? The oppressed people, my favorite influencers and everyone who thinks like me.
So, a well-known economist gives an interview in a liberal media. We are already off to a bad start, because many are predisposed to think that she is an agent of the enemy side. She is not given the benefit of the doubt. She is not heard in good faith. In fact, before speaking, she is already guilty. Of course he is just another evil conspirator. And then he says: “The labor market is very overheated and it needs to cool down in order to bring inflation down.” What outrage!
Inflation in the service sector is on the rise due to rising labor costs. And that happens, because there is more demand for workers than available workers. While this is happening, production is not growing in step with demand. Which, obviously, exerts inflationary pressures. At some point, we must find the balance. After all, it is a matter of tucking in as far as the blanket can reach us.
A shortage of workers with high productivity is positive, because, in this way, wages rise. This translates into an increase in the economic well-being of the population. On the other hand, a shortage of workers with less production is negative, because there is not enough food for so many mouths. Logically, we have a complex situation on our hands. It is a matter of capacity. The situation reduces our economic well-being due to the increase in prices. If more people compete for the same resources, money is devalued. And, when money is devalued, the whole society is harmed. Especially the poorest suffer. Inflation is “inhumane”.
To lower inflation, you have to tighten your belt. In other words, you have to reduce spending. Which usually brings some pain. Because discipline is not as pleasant as indiscipline. But it is a matter of necessity. We sacrifice in the short term for the greater good in the long term.
If, at a family dinner, there is enough food for only four people, but we have six attendees, we all need to eat less so that dinner can be enough for everyone. Is it “inhuman” to ask for that sacrifice?
For the good of the collective, we must “cool down” the economy to find a new balance between demand and supply. Now, if a family member complains about his reduced portion, considering it unfair, obviously, he is not getting the whole context. He is only focusing on the sacrifice he is being asked to make, but he is not very clear about the purpose of that sacrifice. It doesn’t take a genius to figure out that such a complaint comes from the most immature members of the family.
Unfortunately, utopias are perfect in the imagination. In imagination and in opposition. The opposition is always right, because the opposition is not responsible for anything. He complains. But all his proposals are hypothetical. Is always right. Because, in his fantastic world, the “geniuses” are infallible. That infallibility ends when our hero reaches a position of responsibility and it is his turn to be accountable in the real world. At this moment, the utopia is finished.
What is happening with the job market? During the pandemic, due to the confinement measures, the first to lose their jobs were workers in the service sector (hotels, entertainment, restaurants, transportation, health, education, etc.). Then, with the return to normality, companies in the sector once again needed staff. However, they found that many of the former workers in the sector refused to return to their former jobs in search of a better work/life balance, better compensation and a better work environment. In other words, the pandemic changed people’s attitude towards work. Something happened that people preferred to stay at home rather than go back to their old posts. This X factor is responsible for this atypical behavior in the labor market. For this reason, the market does not cease to surprise. He has broken with the old patterns.
The pandemic, in many respects, marked a before and after. Some would learn to live with less. Others developed new talents during the lockdown. Others started working remotely. And others rethought their careers. These changes had a significant impact on the labor market, creating worker shortages in many industries. However, this we are now acknowledging in hindsight. At the time, it cannot be predicted. In other words, all of this is coming as a surprise to us. After all, it’s never easy to make predictions in such exceptional circumstances.
The US Federal Reserve is raising the cost of credit to reduce excess demand. In this way, restore the balance between demand and supply. This “cooling off” is necessary to lower inflation. A labor market that is too tight is an indication that there is still a long way to go in this fight. So, an economist in an interview might sum up the situation by saying that “unemployment has to rise to lower inflation.” And that phrase like that, taken out of context, is easy to misinterpret by people viewing the interview in bad faith. Welcome to a highly polarized world!
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