A global labor market that has remained tight for too long is considered a key factor keeping inflation above central bank targets. Indonesia's situation is relatively controlled, yet it must remain wary of spillover effects from the global economy.
JAKARTA, JurnalPost.com — The exceptionally tight global labor market is once again under the spotlight for economists. With inflation yet to fully return to central bank targets, the fact that unemployment has remained low for such an extended period is seen as a factor explaining why price pressures remain stubborn.
A 58-Month Record Below the NAIRU Threshold
Torsten Slok, Chief Economist at Apollo Global Management, noted that the unemployment rate has been at or below 4.5 percent for 58 consecutive months.
This figure represents the upper bound of the estimated range for the Non-Accelerating Inflation Rate of Unemployment (NAIRU) used by the Federal Reserve, which is the theoretical level of unemployment that does not cause inflation to accelerate continuously.
According to Slok, this period is one of the longest on record. This condition reflects a labor market in a state of excess demand, where the corporate need for workers significantly outweighs the available labor supply.
Such a situation typically occurs only briefly at the peak of an economic expansion. If it persists for nearly five years, it may indicate that economic activity has been running very strongly for a considerable time.
This picture aligns with price developments in various countries. Annual inflation across OECD nations stabilized at around 4.1 percent in July 2026 after a decline the previous month.
Meanwhile, OECD core inflation, which excludes volatile food and energy components, remained at approximately 3.6 percent. Because highly fluctuating components have been removed, the persistently high core inflation indicates that price pressures do not stem solely from short-term supply disruptions but have spread across various economic sectors.
Why Can Low Unemployment Drive Inflation?
The relationship between the labor market and inflation is often explained through the Phillips Curve concept.
When the unemployment rate falls, companies must compete more aggressively to secure workers. This competition can drive firms to offer higher wages.
The resulting increase in labor costs can then be passed on to the prices of goods and services. Simultaneously, workers with higher incomes have greater purchasing power, which in turn increases public demand.
Conversely, when unemployment rises, the bargaining power of workers tends to weaken. Pressure for wage increases diminishes, which can help ease inflationary pressure.
However, this relationship is not as simple as the formula "unemployment down, inflation up."
Inflation is also influenced by the expectations of the public and the business world. When workers and business owners anticipate that prices will continue to rise, workers may demand wage hikes, while companies raise prices to anticipate rising costs.
These expectations can ultimately reinforce inflation.
Additionally, the magnitude of corporate markups —the difference between production costs and selling prices—as well as labor productivity, government policy, and market structure, all influence the price-setting process.
Academically, findings on the relationship between inflation and unemployment are diverse.
A 2018 study by Stamatiou and Dritsaki in Poland found a long-term relationship between inflation and unemployment, with causality running from unemployment to inflation.
Other research on Pakistan indicates that unemployment falling below a certain level has the potential to increase inflationary pressure.
Economist Robert Gordon also argues that the Phillips Curve remains relevant in explaining the labor market-inflation relationship, although the model's ability to predict inflation is not always accurate when economic conditions change rapidly.
On the other hand, some economists argue that the relationship between unemployment and inflation is not always consistent, suggesting that NAIRU estimates should be used with caution.
NAIRU Is Not an Directly Observable Figure
The issue becomes more complex because NAIRU cannot be observed directly.
This figure is an estimate based on economic models and can change in line with developments in the economic structure.
Technological changes, automation, productivity, labor skills, job-seeking patterns, and shifts in aggregate demand can all alter the unemployment rate considered consistent with stable inflation.
If the NAIRU estimate turns out to be lower, the unemployment rate could still fall further without immediately triggering significant inflationary pressure.
This means the economy can absorb more workers before facing the risk of excessive price increases.
However, this condition also makes the boundary between a healthy labor market and an overheated one increasingly difficult to define.
If unemployment remains very low for a long time, pressure on wages and production costs can accumulate slowly. Consequently, inflation may become more persistent than initially anticipated.
Indonesia Is Relatively Controlled
In Indonesia, the situation is relatively more moderate.
Indonesia's inflation throughout 2025 was recorded at approximately 2.92 percent, while core inflation in July 2026 was in the range of 2.76 percent.
These figures remain within Bank Indonesia's inflation target range of 2.5 percent plus or minus 1 percent.
This condition shows that the relationship between unemployment and inflation does not always operate with the same pattern in every country.
Indonesia's labor market structure differs from that of developed nations. The high proportion of informal workers, energy and food subsidy policies, government price control mechanisms, and the nature of public consumption all influence domestic inflation formation.
Therefore, a decrease in unemployment does not automatically lead to an inflation spike of the same magnitude as might occur in other countries.
Nevertheless, Indonesia is not entirely isolated from global economic pressures.
Persistent global inflation can enter the national economy through several channels.
First, import prices. Increases in the prices of commodities, industrial raw materials, food, or energy can raise production costs for domestic companies.
Second, exchange rates and interest rates. When global interest rates remain high, capital flows may move toward countries offering more attractive yields. This pressure can affect the rupiah exchange rate and make imported goods more expensive.
Third, inflation expectations. Global economic uncertainty can influence the forecasts of business players and the public regarding future prices.
If inflation expectations rise, pricing behavior and demands for wage increases may also change.
Lessons for Policymakers
These developments provide important lessons for central banks and policymakers.
An exceptionally tight labor market over a long period can make it harder for inflation to return to target. As wages and labor costs continue to rise, companies may pass some of these increased costs on to consumers through higher prices.
However, monetary policy cannot rely solely on a single indicator like the unemployment rate or NAIRU estimates.
NAIRU itself is an estimated figure that is subject to change.
If a central bank relies too heavily on an estimate that turns out to be incorrect, policy could move too far in one direction.
Overly aggressive interest rate hikes could suppress investment, consumption, and business activity. Conversely, a response that is too slow could allow inflationary pressure to become deeply entrenched.
Therefore, trends in wage levels, inflation expectations, core inflation, productivity, labor market conditions, and economic growth must be read in conjunction.
Wage data can illustrate the tightness of the labor market as well as cost pressures on companies.
Inflation expectations show how the public and business players view future price developments.
Meanwhile, core inflation helps distinguish price pressures stemming from temporary changes in food and energy from more persistent structural pressures.
Ultimately, the 58-month record of low unemployment serves as a reminder that inflation is never determined by a single number.
Price movements are formed through complex interactions between the labor market, wages, productivity, demand, public expectations, government policy, and central bank decisions.
For Indonesia, the current domestic inflation condition is relatively controlled. However, the tightness of the labor market and persistent inflation in several countries must still be monitored, as global pressures can spill over through trade, exchange rates, interest rates, and production costs.
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