How does inflation affect employment?

Answer 1

If the employer is unwilling or unable to inflation proof the salaries of his employees, they will obviously become disillusioned and disgruntled. Some may seek greener pastures and if those that leave include key individuals, the profitablity of the company may be adversely affected.

Answer 2

Prices get generally higher for a reason.

Firms / companies need money. In order to get that, they may cut their costs. The logic is that they will have less capital to invest in. Result: either quality is affected, or employment is. In that case, it will be a negative development because the firm / company likes to produce more efficiently. As a result the workforce productivity increases, meaning the employment decreases.

However inflation can positively influence employment as well. A company may risk its budget in employing good quality workforce to get back on track, on the market and compete.

Please note that how inflation specific influences employment also depends on the type of market; are we talking about perfect competition, monopolistic market ... ?

Besides these technical aspects, there is also a psychology behind this all. The rising prices over time could lead to employment rates increasing. The reason for this depends on how the inflation affects the management of the companies.