Unemployment is a major problem in many countries. More often than not it has negative effects on the economy. It is safe to say that unemployment is directly proportional to the economic state of a nation meaning that the higher the unemployment rate, the higher the effects on the economy. One effect of unemployment is increase in poverty. Unemployed people do not have a way of fending for themselves and providing their families even with basic needs like food. Such people live below the poverty line. With unemployment and a need to satisfy basic needs, the citizens get into debt and negatively impact the economy.
Unemployment could also lead to political instability. An unstable government cannot be economically strong. Most unemployed people may engage in activities that fight the government because they lack something to do. This makes it hard to govern, hence a drop in the economic status of a country. Other effects of unemployment include rise in social problems like gambling and prostitution, misuse of human resources, and exploitation of labor. With so many problems like these, it becomes hard to have a stable economy, and effectively poverty sets in.
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Inflation on the other hand refers to a rise in the prices of commodities with the fall of purchasing value of money. Inflation can be caused by a rise in demand or an increase in prices. One positive impact of inflation is the rise in investments. Because inflation means money losing value, it is better to buy assets that will appreciate in due time, rather than keeping the money which will reduce in value in years to come. This has seen people invest in shares and equity bonds with an aim of reaping big when they eventually liquidate.
While investing is a good side of inflation, it only leads to more inflation. Since a majority of people will be rushing to spend money in buying assets, there will be a lot of money in circulation, hence the value depreciating further. Other effects of inflation include rise in the cost of borrowing; that is banks raising the interest rates on their loans. Inflation also reduces unemployment. With rise in inflation, the employers offer higher wages, hence they are able to employ more people on short term basis. Inflation also increases or reduces growth, strengthens or weakens the currency, and lowers the cost of borrowing.
If the policymakers cannot stabilize both inflation and unemployment, then it would be better to deal with unemployment first. Suppose the government decides to work on the inflation rates, only the employed will benefit because they are the ones with money to spend. The unemployed will still suffer the same predicament because of lack of money to spend even with a reduction in inflation. The government therefore ought to look into unemployment. They should create more job opportunities to allow all citizens a chance at affording a decent living.
By creating more job opportunities, the government is enabling its citizens to deal with the adverse effects of unemployment and inflation. With a job, one is assured of an income, and hence purchasing power increases. Also, with a reduction in the rate of unemployment, employers will be forced to pay more as there will be competition for the skills needed. The spending power of consumers goes up with an increase in their wages. When most people can live above the poverty line by affording life’s most basic needs, then the economic status of the country is greater. A reduction in unemployment rates is a win for the economy. I would therefore advocate for the government to look into unemployment first before inflation.
