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International Law

: China Hearsay

Jobs vs. Inflation

By Stan

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Ah, the age-old dilemma. Every central banker worries about it, every student of Econ 101 learns about it, and Wen Jiabao is commenting on it. And so is Michael Pettis:

That is the nub of the policy dilemma. One of the consequences of China?s expansionary monetary regime has been fairly rapid employment growth, but not enough growth to eliminate altogether the threat of rising unemployment. The problem the government faces is in figuring out how to engineer a sharp slowdown in monetary growth without triggering job losses. It is not going to be easy, but it probably mean that they will take serious steps to address monetary expansion only when the consequences (e.g. inflation) are so severe that they cannot be ignored.

This might be a little boring for those of you looking for articles on political unrest and rising tensions between China and other countries. Keep in mind that all of those issues become much more difficult to deal with if inflation keeps rising and/or unemployment goes up quickly.

Remember your undergrad class when you learned about the inverse relationship between inflation and unemployment? The Phillips Curve, right? It’s a little out of date these days, and analysis of the relationship between inflation and unemployment is much more complicated and messy than what you get out of a standard Macro textbook.

I guess the crux of the matter is whether the government can slow monetary growth without sending the economy off a cliff. Sounds difficult to me. The scuttlebutt over the past several weeks has been that the government is already expecting some severe job losses this year; I would suspect that this is coming from the export sector. Pettis seems to think that the government will only act when forced to do so, suggesting that unemployment is still at the top of the policy priority list. Despite having no idea what I’m talking about on the subject (although I have fond memories of Macro from grad school), I agree that unemployment is still number one. If food prices keep going up, though, my opinion could change.

Full post as published by China Hearsay on March 24, 2008 (boomark / email).