What Happened To Freddos Being 10p? Deflation; Part Two

So, in the previous article we looked through the negative effects of inflation- how it can spiral, leave people impoverished, and so on- and we also looked at a positive if you like borrowing.
However, let's talk deflation- the reduction of general prices in the economy.

What causes deflation? It's exactly the opposite of inflation. Inflation is caused by an oversupply of money in the economy- deflation is caused by an undersupply of money. Whereas inflation decreases the value of money, deflation increases it, causing things to become cheaper. Sounds good, right?

There are many consequences of deflation however that can be damaging- profit loss for businesses being the root of the major ones. Dropping prices to an extent are beneficial- it can grant more people access to essentials such as heating, which, as discussed in the previous article, can save lives.

However if deflation gets out of control, falling prices will mean profits of businesses will fall- and thus most businesses will cut down on costs, leading to people being made redundant, factories and offices shutting down, work being outsourced, and so on.
Unemployment would increase, and even those fortunate enough to keep their jobs would see their pay decrease.
Unemployment can be devastating- it would lead many to default on any loans or mortgages taken out, it can cause people to lose their homes (though this is more likely in the USA than the UK).

You may be thinking, why have we heard so much more about inflation in the news than deflation? Well deflation can often be more easily controlled by governing authorities. In the USA, the Fed (the central bank) prevents deflation by flooding the market with money, thus increasing prices. The UK follows a similar protocol- we mentioned previously the idea of Quantitative Easing.

So should we be happy that the price of a Freddo has increased over the past two decades? Not really- but perhaps the fact that it didn't drastically fall in price is something we should also be well aware of.

What If Everyone Had A Job?

In recent times of economic trouble, unemployment in Britain has risen considerably in the past decade. From a relatively healthy 4.5% rate in May 2005, in April 2014 it was recorded at 6.8%- not an insignificant rise in any sense. This has led to the more and more citizens becoming reliant on state benefits- easily proven by the debate over benefits of the last few years, and shows like 'Benefits Street', which makes quite a crude reality-style show out of the lives of a group of unemployed people on benefits.

The ideal situation to most people, after having constantly been hearing news of unemployment in the last few years, is that everyone has a job- that no one is unemployed, that we have full employment.

Full employment has no agreed definition, though of course it cannot mean purely 100% employment- as there is always likely to be Frictional unemployment- that is the unemployment of people who may be searching to change, or is in the process of changing their employment. Christopher Pissarides, professor of economics at LSE states "full employment never meant zero unemployment".

The apparent benefits of full employment are clear- more people would have a wage, would be able to afford a living, homelessness would decrease, no one would have to depend on benefits- but the potential effects of full employment go deeper. Let's look at just a few.

Firstly, an advantage (though I'm sure some would disagree with me) is that full employment would empower regular workers. Employment is a scarce resource, just like oil or gold- and, just like these scarce resources the value of employment increases as unemployment decreases. As more people gain jobs, the pool of unemployed workers will grow smaller and smaller. It will be harder to find employees.
Thus the employees will be empowered more in a world of zero unemployment than in one of unemployment. We've seen recently, perhaps moreso in the USA, that mass unemployment has decreased the value of workers- that they have become almost disposable. As a business could easily find someone else desperate for their job, workers have been suppressed via long working hours, terrible pay and the like. A world of full employment would be the opposite of this.

On the other hand, the potential wage rise that could result from this could simply lend itself to a larger cycle.
As wage demands increase, so would inflation- this was notable for example in the 1970s, when acceptance of union demands for higher wages was closely linked to rising general inflation.
What this does is in effect create a nominal wage increase- people may begin to see a higher number on their paychecks, but the benefits of this would most likely be cancelled out by rises in prices of everyday items, the general cost of living. Take an example- if your wages rose by 4%, but the price of bread rose by 4%, you wouldn't directly benefit on your weekly shop- because the extra money you earned would be spent on the same things you purchased before. If you could normally only afford 1 loaf of bread, after your nominal wage increase you'd still only be able to afford 1 loaf.
This is not what we really want, a real wage increase. A real wage increase would mean increase in purchasing power- so that you could afford an extra loaf after your wage increase rather than one.

The 'cycle' mentioned earlier relates to the business' viewpoint of this. An increase in expenditure on wages that full employment may enforce would be an extra cost that potentially could lead to spending cuts, if the business is not willing to absorb the costs of extra wages (certainly not a rare occurrence). This would lead to people losing their jobs- reversing the effect of full employment. Of course this would be a long term shift, but arguably it implies full employment is no sustainable solution itself, but part of a larger repeating shift in the economy.

So, full employment has potentially far deeper effects than at first glance. Only two have been mentioned here (for the sake of relative brevity)- what do you think about full employment? An ideal target or a false friend?