Why Does a Zero Inflation Rate Affect Unemployment?

Zero inflation means the buying power of your dollar does not change over time.

Economic theory suggests that employment is tied to inflation in that high unemployment can cause a deflation, or depression. Monetary policy is used to stimulate the economy to balance employment and inflation.

Zero Inflation Rate

A zero inflation rate implies that the value of money is not changing over time. According to the nonprofit policy think tank The Brookings Institution, a zero inflation rate would permanently reduce employment.

Natural Growth

There is a natural growth in the number of workers in the labor force because the population is not stagnant. An increasing labor force combined with no inflation could result in higher unemployment.

Natural Unemployment

The Federal Reserve Bank of Atlanta describes the non-accelerating inflation rate of unemployment (NAIRU) as a controversial measure of a supposed natural unemployment rate that keeps the economy stable---without causing inflation or deflation.

References

• The Brookings Institution: Low Inflation or no Inflation
• Federal Reserve Bank of Atlanta: History and Theory of the NAIRU

Resources

• Bureau of Labor Statistics: Inflation & Prices