Low unemployment empowers workers, prompting firms to raise prices and protect profits.

Evidence

When there are fewer unemployed workers, employed workers gain bargaining power and can demand higher wages. Indeed, in a tight labor market, companies are forced to compete against one another for workers by offering better wages and benefits. If wages rise, the system risks getting jammed, since producers will either stop producing or pass on the higher labor costs to consumers (who are the workers themselves) by raising prices. The result is inflation. Companies decide to raise prices to offset the increase in costs so that profits are unaffected. — Clara E. Mattei, Escape from Capitalism, 273

Categorization

• DEFINE: Explains the causal mechanism by which tight labor markets lead to inflation through corporate price-setting.