Full Employment Inflation

Full Employment Inflation

Full Employment Inflation is a condition in which the total demand for goods and services in the economy is larger than their supply, and it is characterized (if unchecked) by a constantly rising level of prices. Once an inflation is under way rising industrial costs tend to be followed by rising prices. Wage (and other pay) increases are sought to compensate for the decline in real wages and they are granted because they can be passed on in higher prices to the consumer. This further increases costs, and (in the absence of action by the monetary authorities) the cycle becomes sell-perpetuating. A policy of full employment that leads to over-full employment can start off an inflation. Since labour is fully employed the employer must pay higher wages to attract sufficient employees. If prices and wages are rising together, as is usually the case, real wages may not rise, and trade unions try to keep ahead of the inflation by demanding increases in money wages . An inflationary spiral can also be initiated by increases in other costs or by autonomous price rises due to changes in the conditions of demand arising from increasing incomes or changing social habits.

Various methods of mastering or controlling the inflation accompanying full employment have been suggested. First, some economists argue that a degree of inflation be accepted as a stimulus to growth. The weaknesses of this policy are that continued inflation tends to distort the structure of production, bear heavily on the fixed-income classes (whose real income is constantly reduced by rising prices), sooner or later bring pressure on the balance of payments (as exports increase in price and become less competitive abroad) and that inflation may not remain moderate for long. Secondly, other economists believe there may be a 'wages policy' that prevents wage increases from initiating or feeding an inflation, and that it can be achieved by publishing a figure calculated by the Government as the highest average increase in earnings and salaries compatible with a stable level of prices and persuading the trade unions not to exceed it. One difficulty is that on a changing economy some industries and firms will have to pay more than this figure, others less. The Government may be able to apply the policy to its employees in the public sector, at least for a period until recruitment becomes difficult and employees are lost to private industry, where employers and unions make their own settlements, and if a free market in labour is thought desirable the Government can only advise and persuade, and not direct. This kind of policy will therefore work only if collective bargaining is abandoned or limited. Thirdly, some economists, such as F. W. Paish, have argued there is no other way of avoiding inflation except by revision of the post-war British full employment policy. This view has been reinforced by statistical studies showing a close relationship between the level of .unemploymentand the rate of wage increases. An .unemploymentrate nearer 3 than z per cent would ease the pressure on resources, especially on labour; government al measures would ensure that most .unemploymentwas only transitional. The difficulty is to know precisely when full employment is reached or when the demand for labour equals the supply; this view admits the difficulty but urges that it is better to stop economic expansion before demand is equal to supply than to risk over-full employment.

Whatever the answer to the problems created by full employment it would seen that every Government will adopt economic policies that ensure 'a high and stable level of employment' if not full employment, and assist the unemployed to find new work more quickly and help them more generously until it is found.

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