Unemployment in times of inflation

Everyone is probably wondering whether the price crisis will cause unemployment. Unemployment in times of inflation is an interesting phenomenon. According to the theory of economist William Phillips, the relationship between inflation and unemployment is inversely proportional. In other words, when the unemployment rate is low, wages and prices rise quickly, and the reverse is also true – when unemployment is high, wages and prices rise slowly or fall.

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Although the Phillips curve is a familiar concept, there are several cases where it has been shown not to work as a rule of thumb. Already in the 1970s, it was shown that periods of stagflation, i.e. high inflation and unemployment, are possible. Phillips himself warned as early as 1958 that this relationship is valid only when there are no strong external shocks to the prices of input goods (such as high energy prices). At the same time, small and open economies such as Croatia are particularly vulnerable.

According to economic indicators, nominal wages in the Republic of Croatia are growing nominally by 7.5% per year, but in reality much less due to cost shocks. In other words, real wages are actually falling. This means that work in Croatia becomes cheaper, which in itself maintains employment and prevents a large increase in unemployment. From this, it could be concluded that Croatia is not currently threatened by a decline in employment.

High unemployment and high inflation

Of course, the question that arises in everyone’s mind is whether Croatia is moving towards a period of stagflation, i.e. high inflation and high unemployment. There are several types of relationships between inflation and unemployment. As prices rise, companies may start cutting costs and even lay off employees to maintain a positive level of income. The rise in prices also causes a drop in the general consumption of goods, which can lead to reduced demand for products and a drop in the income of companies, which again have to lay off workers. This is why inflation can still cause unemployment to rise.

However, there is also inflation in which price growth is triggered by an increase in demand, so companies are looking for new employees to increase their productivity and thus their supply. That is why unemployment can decrease during periods of inflation. The current crisis does not appear to be a crisis in which demand has increased, so a significant drop in unemployment cannot be expected.

Furthermore, compared to USA, Europe is months behind and is waiting for the transition from the study of monetary policy to the stage of awareness of economic contraction. Europe is even experiencing labor shortages in some occupations, which could result in wage growth at the international level for certain occupations.

In Croatia, further recovery of the service sector is to be expected, which is increasingly looking for workers whose wages are lower than those in other professions, but due to demand, they are now growing faster than others. That’s why it’s worth checking the Štoradiš.hr portal to check job offers.

Europe perseveres

Although it is unknown whether there will be a significant increase in unemployment, a combination of factors indicates that the European economy is more resistant to energy shocks, the war in Ukraine, and accumulated logistical problems than expected, so Europe is only on the brink of recession and the corresponding increase in unemployment.

According to the IMD report from mid-2022, Croatia has shown moderate progress in terms of economic freedom, market deregulation, and ease of doing business. Croatia stopped being at the back of the EU countries and moved closer to countries like Latvia and Slovakia. It advanced by 11 places in terms of state efficiency and is now ahead of Slovakia, Poland, Romania, Bulgaria, Spain, and Italy.

The conclusion about employment during the recession is that the drop in real wages or living standards replaced unemployment. Instead of people losing their jobs, their wages lose value. According to data from the ILO, from 1999 to last year, 2022, Croatia achieved a wage growth of only 1%. Companies currently do not need to lay off workers because they have more capital than before the Great Recession.

Because of this, it is more profitable for them to keep workers than to go through the risky process of firing, paying severance pay, and other costs, only to have to hire new workers again after a certain period. The problem is not unemployment but that wages are losing their real value, and this could create strong competition in certain branches of the economy to attract the best workers from programmers to chefs.

One of the key problems in Croatia is long-term (not short-term) unemployment, which has several causes, but also several remedies. One of them is a career change or retraining. You can check which occupations are in demand on the Štoradiš.hr portal.