Price inflation and labour market outcomes 1

Price inflation and labour market outcomes

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 Price inflation and labour market outcomes 2

Inflation refers to a continuous increase in price over a given period. It captures the

general rise in prices or cost of living in a given country (IMF, n.d.). Many economists view

inflation from certain perspectives depending on the context. For example, some view inflation

from the price perspective, while others might view it from a wage viewpoint, depending on

what they wish to highlight. Price inflation can denote a continuous increase in the price of a

basket of goods or services or systematized services or goods over a specified period, usually a

year. Its causes are attributed to robust demand and a dip in supply. When drafting their

monetary policies, price inflation is vital for economic regulators, especially central banks.

On the other hand, wage inflation refers to the systematic rise in nominal wages,

insinuating that workers earn higher wages or pay. It tends to have an impact on price inflation as

well as trigger economic growth as an increase in disposable income. The effect of wage

inflation depends on whether the rise is real (such that it surpasses the standard inflation rate) or

nominal (such that the wage increase equals the standard inflation rate increase).

Over the past months, countries across the globe have experienced a rise in price

inflation. Several factors have caused the ongoing global inflation across countries. These factors

include the increase in energy prices worldwide due to the Ukraine-Russian war. In addition,

Russia is a major global exporter of crude oil; hence with Russia being sanctioned by most

Western nations, particularly the United States, Canada, and European Union, there was a dip in

the global oil supply. As a result, many countries scrambled for the available supply, pushing

prices up.

Furthermore, most manufacturing sectors are powered by fossil fuel products or related

energy; hence with reduced supply, their cost of business rose, thus transferring the same to

consumers through a price increase. Another reason is the supply chain disruptions caused by the
 Price inflation and labour market outcomes 3

Covid-19 pandemic. Despite the world having recovered or learned to live with the virus, it is

still yet to fully recover from the supply chain disruptions caused by the pandemic as most

countries started limiting the export of certain critical materials, thereby causing an increase in

prices across the world. Furthermore, the war in Ukraine also disrupted the global food chain as

Russia and Ukraine are significant exporters of grains and fertilizer worldwide. Therefore, with

disruptions in the supply of food, prices of basic food started rising, causing inflation to increase

worldwide.

The rise in the price of commodities globally caused an increase in the cost of living for

many people, including here in the United Kingdom. In the UK, inflation rose to record-high

levels driven by the factors mentioned above, particularly soaring food prices which jumped at

14.6% year-on-year, and an increase in energy prices (Ziady, 2022). In addition, many

households struggled to make ends meet as price increases did not resonate with the existing

wage levels. As a result, inflation hit a 40-year-old high of 10.1% in September (Bank of

England). In general, the world experienced a rise in global inflation from 4.7% in 2021 to a high

of 8.8% in 2022, with an expected decline to 6.5% in 2023 and 4.1% in 2024 (IMF, n.d.). With

such high inflation rates the world is currently facing, global economic growth will be hampered,

as seen by a drop from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023 (IMF, n.d.). Such

continued declines in economic growth and higher inflation have severely impacted the global

labour supply.

Inflation impacts labor market effeteness by influencing companies' wage-setting

approaches and compensation plans. In competitive products, labour, and capital markets,

employers will lose employees if employers set lower wages, thus affecting productivity and

profitability (Lynham, 2018). In contrast, if an employer pays excessively high, such will
 Price inflation and labour market outcomes 4

increase its overall cost and affect the business' profitability. Therefore, any aspect that interferes

with a company's precise wage-setting can negatively impact its growth and employee turnover

and cause an increase in unemployment. One such factor is inflation. Over the past few months,

the world has been experiencing increasing inflation; hence such can disrupt the wage-setting for

many companies globally. Price inflation can significantly affect a company's wage-setting if the

employer miscalculates when determining if they should adjust their wage-setting hence

impacting its overall outlook.

The labor market uses the same laws of demand and supply as the goods and services

markets. Thus, a higher price (wages or salaries) in the labor market will lead to a decline in the

quantity demanded by companies or employers. While a lower price causes supply to decline as

employees seeking jobs stay away. Thus, prices can significantly shift the labour supply market

curve. The shift will be achieved through a supply shortage in the market as more people will be

demanding more wages to match the price inflation while, on the other hand, the employers may

be unwilling to offer these high wages. Therefore, such significantly affects the labor market

outcomes.

With an increase in price inflation, the cost of living will increase as workers' disposable

wages will lose their purchasing power if it remains the same. In addition, should employers

maintain the current wages, the labor market supply will be disrupted as some individuals will

start demanding an increase in wages to resonate with the rise in price levels. In contrast, others

may resign or shift to employers willing to match wages with the current cost of living. Still,

many workers have been carrying out strikes and demonstrations across various industries to

push for wages to match the increasing inflation rates. Moreover, many union representatives are

pushing employers into tough contract negotiations to avail employees' demand for better pay
 Price inflation and labour market outcomes 5

that can help these employees live a life that matches the current increase in price commodities.

And with companies and businesses facing huge costs associated with energy and the price of

key raw materials due to inflation, many have resorted to downgrading their workforce, thus

pushing more people out into the labour market. Recently, Facebook laid off 11,000 workers due

to increased inflationary pressures, thus increasing the number of individuals in the labor market

who have lost their jobs due to price inflation. Therefore, such underpins the impact of price

inflation on the labour market outcome.

With households and businesses expecting price inflation to remain high soon, the

inflationary shock will propel workers to demand more pay to compensate them for expected

higher price inflation. Such demands will result in employers reducing their workforce as

actualizing demand for increased salaries or wages would eat into their profit margin (Groshen

and Schweitzer, n.d.). In such a tight labour market, employee turnover is high, and hiring is

difficult; thus, employers are faced with significant questions on how much they will increase

wages and salaries to meet the labour market expectations amid the threat of recession.

Moreover, such heavily impacts labour supply as more people will refrain from applying for jobs

they consider non-appealing as per the existing inflationary pressures.

For example, in the UK in the three months ending May, the private sector increased its

total pay by 7.2% while the public sector increased its total pay by 1.5%, registering an overall

average of 6.2% (Smith, 2022). Such did not resonate with the rise in inflation, as inflation rose

by an average of 8.37% during the same period, thus heavily impacting the real wages of many

workers across the country. With falling real wages amid increases in essential commodities and

energy prices, many workers are living under the same wages and salaries. Thus, the UK has

witnessed a rise in strikes across many sectors as workers are engaged in industrial actions to
 Price inflation and labour market outcomes 6

protest against below-inflation wages (Cooban , 2022). Lawyers, postal workers, firefighters,

doctors, civil servants, and transport workers have gone on strike. Such has disrupted the labour

market outcome as more workers become choosy in offering their services to firms unwilling to

resonate with inflationary.

Price inflation has resulted in an increase in the labor supply in some countries. For

instance, in the United States, there has been an increase in people coming out of retirement to

fill labor shortages affected by the "great resignation" after the covid-19 pandemic (Yahoo, n.d.).

Many of these returnees are doing so because the cost of leaving has been increasing, and to be

able to afford daily and basic needs, they must supplement their retirement benefits with new

wages. These groups of employees are willing to work with the existing wages; thus, many

employers would prefer their services over other employees demanding increased pay. Such

willingness to work at the current rates has enabled employers to get quality labor cheaply as

these returnees are experienced and don't have too many demands. Therefore, returning retirees

have increased the labor market supply marginally, positively affecting labour supply and its

market outcome.

As many people and households struggle with lower wages and salaries, policies aimed at

strengthening supply and shoring up their financial steadiness should be prioritized over

approaches that recommend sacrificing employment to lower. Thus, governments across the

globe have come up with policies aimed at easing the inflationary pressure on prices of consumer

goods and services; hence such would impact the labor market supply or outcomes. For instance,

United Kingdom's central banks are tackling rising inflation by increasing interest rates (Spencer,

2022). Such a policy would reduce the money supply in the economy and result in the demand

for goods and services decreasing; hence price of commodities will experience a reduction.
 Price inflation and labour market outcomes 7

Moreover, with reduced prices, many households' real wages will improve their purchasing

power, thus enabling them to survive within their current salaries or wages. Therefore, such a

policy would increase labor supply as more people can live within the pay offered, thereby

improving the labour market outcomes.

Another policy the United Kingdom has adopted is direct financial assistance to the low-

cadre members of society to help them keep up with the increasing energy costs and food prices.

Funds to finance this policy are from taxes collected from oil and gas corporations (Spencer,

2022). The policy of offering assistance to the least well-off in the community will relieve some

significant pressure on employers regarding the demand for an increase in wages, especially

those employees who constitute the minimum wage category. Such will positively impact the

labour market, as more people will be comfortable working with the current wage rates while the

relief will act as a supplement for wages earned. Therefore, such a policy will increase the labour

supply in the market.

Another policy is reinstating the power of workers, which calls for radical reforms such

as reconsidering corporate governance structures. Such a reform would offer workers a

significant say in organizations or companies they work for (Spencer, 2022). Another reform

would be strengthening the union's power and broadening aspects of public and employee

ownership. Such would help achieve a balance, allowing employees to demand pay that resonate

with the current economic outlook vibrantly. Therefore, the resulting impact of such a policy

would be improving the labour market outcomes as more employees would be buoyed to avail

their labour hours while employers would likely compromise to ensure their productivity is

enhanced.
 Price inflation and labour market outcomes 8

Overall, the increase in price inflation globally has tremendously impacted the labor

market supply and demand. Price inflation affects the real wage of workers, hence impacting

their purchasing powers. Thus, many will demand an increase in pay which many employers

may be unwilling or unable to match to the current inflation rates, impacting the labour supply

market as more will opt to quit or shift to companies that can meet their wage demand.

Therefore, governments should develop policies that can positively reduce the impact of price

inflation, rectifying the labour market outcomes.

 Price inflation and labour market outcomes 9

References

Bank of England. (2022, September 23). Will inflation in the UK keep rising? BANK of

ENGLAND. https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-

keep-rising

Cooban, Anna. “Strikes Sweep Britain as Soaring Inflation Savages Living Standards | CNN

Business.” CNN, Cable News Network, 1 Sept. 2022,

https://edition.cnn.com/2022/09/01/economy/uk-strikes-inflation/index.html.

Groshen, E., and Schweitzer, M. (n.d.). Inflation Goals: Guidance from the Labor

Market? Retrieved November 13, 2022, from

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci3-15.pdf

Lynham, J. (2018). 4.1 Demand and Supply at Work in Labor

Markets. Pressbooks.oer.hawaii.edu.

https://pressbooks.oer.hawaii.edu/principlesofmicroeconomics/chapter/4-1-demand-and-

supply-at-work-in-labor-markets/

“Older Americans Head Back to the Workforce amid Inflation and Volatile Stocks.” Yahoo!,

Yahoo!, https://money.yahoo.com/older-americans-head-back-to-the-workforce-

171922301.html.

Spencer, D. (2022). Wages: Why are they not keeping up with inflation? [online] World

Economic Forum. Available at: https://www.weforum.org/agenda/2022/06/wages-why-

are-they-not-keeping-up-with-inflation.
 Price inflation and labour market outcomes 10

Smith, Elliot. “Britain Faces a Summer of Strikes as Historic Inflation and Falling Real Wages

Bite.” CNBC, CNBC, 22 July 2022, https://www.cnbc.com/2022/07/22/uk-faces-a-

summer-of-discontent-as-inflation-and-real-wage-declines-stoke-strikes.html.

World Economic Outlook. (n.d.). IMF. https://www.imf.org/en/Publications/WEO#:~:text=This

%20is%20the%20weakest%20growth