The Economic See-saw of Inflation and Unemployment
May 2025 | By Yi Chen Choo
Ever wonder why the price of your favorite snacks seems to creep up, or why adults talk about "jobs" and the "economy" with worried faces sometimes? These aren't just boring grown-up topics, they're about two powerful forces called inflation and unemployment. Think of them like ends of a giant economic see-saw that affects almost everything, from your pocket money's buying power to your future career opportunities. Let's break down what they are, why they matter, and how they often move in opposite directions.
What is Inflation?
Imagine the wantilan (school canteen). Let's say last year, your Rp. 50,000 daily lunch money allowance could buy you a plate of butter chicken plus ice lemon tea. But this year, that same Rp. 50,000 only gets you the plate of butter chicken. The ice lemon tea is now out of reach unless you have more money. That's basically inflation in action.
Inflation is the rise of the general level of prices for goods and services, and as a result, the fall in the purchasing power of currency, when your money buys less stuff.
On the other end of the spectrum is deflation, which is the the exact opposite of inflation where it is a fall of the general price level.
Why does it happen?
Imagine everyone wants the new JIS hoodie. It turns out there is only one left. The base price of the hoodie was Rp. 200,000. Both John and Ricky would have exactly Rp. 200,000 if not for their mothers giving them an extra Rp. 200,000 bonus. The store clerk would have happily accepted John’s Rp. 200,000 for the hoodie, but because Ricky has extra money, he decides to bid up the price offering Rp. 250,000 for the hoodie. John sees this and decides to do the same until the price gets bid up to Rp. 400,000. That’s inflation.
In a more general sense if many students have money saved up. The school store might raise prices to around where the demand for the hoodie is the same as the amount of hoodies they have available. Because demand is high, they’re able to sell at higher prices while still selling all the hoodies they have. This works in favor of the school as they are able to still sell all their hoodies but at higher prices, increasing the profit they make. In the economy, if everyone has more money to spend (maybe due to government support or loans) but factories can't produce goods fast enough, prices get bid up. This is called Demand-Pull inflation.
Another reason this could happen is if a good’s cost of production increases. What if the cost of chicken for Sodexo's butter chicken doubles? Sodexo’s manager has to raise the butter chicken price to cover their expenses if they want to maintain profit. Similarly, if things like oil or wages for workers become more expensive for businesses across the country, they often pass those higher costs onto consumers through higher prices. This is called Cost-Push inflation.
What is Unemployment?
You might think unemployment is just people not having jobs. But the problem with that definition is that are students consider unemployed? Well… not really. We don’t have jobs because we are not ready to have jobs yet. It would be inaccurate to say we are unemployed. The unemployment rate measures the percentage of people who are unemployed, defined by people in the labor force (the total number of people, who are of working age and are actively seeking employment) who are actively looking for work but cannot find jobs.
Why does it happen?
Imagine you're great at singing, but the only club with openings is the Strings in Action club. Your skills don't match the spot available. Sometimes, the jobs available in the economy require different skills than the workforce possesses, maybe due to new technology. This is called structural unemployment where it happens due to mismatches of skills between what workers are able to do versus what employers want workers to be able to do.
When someone graduates university and starts looking for their first job, or leaves one job to find better ones, there's usually short periods of unemployment. This is called frictional unemployment because it is caused by the “friction” of transitioning between jobs and is always present to some degree.
What happens to all the Santa actors when its not Christmas? They are out of work until Christmas rolls around again which is seasonal unemployment.
Inflation vs. Unemployment
Traditionally, economists observed an inverse relationship between inflation and unemployment. This means that we can’t have low unemployment and low inflation. Think back to our see-saw:
When almost everyone who wants a job has one (low unemployment), people generally have more money to spend due to everyone having income. This increased spending can lead to that "new hoodie" scenario, pushing prices up (demand-pull inflation).
On the other hand, when many people are looking for work (high unemployment), they generally have less money to spend since they are not currently receiving any income. Back to the hoodie scenario, this means both John and Ricky have actually less than Rp. 200,000 so they are unable to buy the hoodie, let alone bid up the price. This decreased demand can slow down price increases.
Where Do We See This?
Governments and central banks constantly monitor inflation and unemployment. They use policies like changing interest rates or government spending to keep both at healthy levels. You can see this play out in news headlines discussing economic growth and decline (like the major global one in 2008-2009) or periods of rising prices (like many countries experienced post-pandemic).
Why Should You Care?
Understanding inflation and unemployment helps you understand the world. Inflation affects how far your money goes, whether it's your allowance now or your salary later. Unemployment affects job opportunities for you in the future. These concepts influence decisions about saving, spending, career choices, and government policies. You may even be able to argue with your employer about salary increases in the future (hehe)! So, the next time you hear about rising prices or job numbers, remember the economic see-saw. It's a super important part of how our world works!
Glossary:
Cost-Push Inflation: Inflation caused by rising production costs (materials, wages) passed on to consumers.
Deflation: A fall in the general price level; the opposite of inflation.
Demand-Pull Inflation: Inflation caused by too much demand or money chasing too few goods, bidding prices up.
Frictional Unemployment: Short-term unemployment during job transitions (changing jobs, entering the workforce).
Inflation: A rise in the general price level, reducing the purchasing power of money.
Inverse Relationship (Inflation/Unemployment): The observed tendency for low unemployment to correlate with higher inflation, and high unemployment with lower inflation (like a see-saw).
Labor Force: People of working age who are either employed or actively seeking employment.
Purchasing Power: The amount of goods and services that can be bought with a specific amount of money.
Structural Unemployment: Unemployment due to a mismatch between worker’s skills and available job requirements.
Unemployment Rate: The percentage of the labor force actively seeking work but currently jobless.
