Recently, a friend asked me how inflation and jobs are connected. My response is included below. Let me know what your thoughts are.
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"Short answer: More jobs = More Aggregate Wages = Greater Consumer Demand & Lower Unemployment/Tighter Job Market = More demand for qualified talent = wage growth ...which eventually could lead to inflation.
Long answer: Forgive me for this, but I think it will help to expound a bit. Also note that these comments are generalities, and are affected by a myriad of factors not mentioned here.
Inflation is essentially having more money for something than there are of that thing to consume at a given time (which leads to a price increase). In other words, too much money for too few goods. Companies produce goods or acquire resources for services, in part, based on projected consumer demand. Consumer demand (in aggregate) is affected by many factors, including the job market and how much those jobs may pay (wage growth).
If unemployment is high, consumers as a whole won't have as much money to spend on goods & services. The Federal Reserve (Fed), through its Open Market Committee (FOMC), implements monetary policy to manage interest rates & the supply of money in circulation. Specifically, when the economy slows down & demand is reduced, they'll lower interest rates to make it easier for consumers (& corporations) to borrow money to consume (or produce) goods. During the current recovery, as the article suggests, while the headline unemployment rate has come down to 6.1%, there are many who are still unemployed, underemployed, or are "discouraged"/have given up looking (roughly 12% as of August 2014).
At the same time, corporations slow the production of new goods in order to work off current inventory. Because they aren't producing as much, and don't forecast consumer demand improving sufficiently in a given time frame, they seek to be as cost-conscious as possible. Reducing their headcount is often where that effort leads. Households, in turn, reduce their spending, and recently have also improved their savings rates & personal balance sheets by paying down debt. This is good for the household, though it does also take money out of circulation and reduces demand.
At some point, a balance is reached. Unemployment begins to decline, consumers slowly begin to spend a little more, and companies begin to hire again. This is the proverbial game of "Chicken", because they are somewhat interdependent. When jobs return at a level where there is increased competition for talent, not only are more people working as a whole, but they are also making more money. Household disposable income increases, spending likely increases, and inflation slowly becomes more of a threat. The Fed's challenge is to make sure they don't raise rates too soon - derailing the recovery - but also keep inflation in control.
We are not at the point where inflation is a concern."
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