On This PageAugust, No. 12

When the labor market is tight, wages go up. Further, higher wages are likely to boost inflation because wages are a significant fraction of production costs. As a result of these straightforward linkages, low unemployment should mean rising inflation. Conversely, high unemployment should drive down wages and dampen inflation.

Why is Inflation So Low?
Last Updated: 08/30/88

Why, then, has inflation remained low and more or less steady during the 1980s? Why have wages not accelerated as the unemployment rate was nearly halved- a drop of 5 full percentage points, from 10.7% in 1982 to 5.7% in the first quarter of 1988?

Answers to these questions might also help explain the events of the 1970s, which were even more paradoxical. During that time of "stagflation," both unemployment and inflation shot up side by side.