Demand and Supply are linked with Employment...

The capital and labour are the two important factors of production which add to the cost of production and prices, the cost is an important determinant of productivity and competitiveness in the terms of demand and supply, both, and innovation may also increase these two. The demand and supply competitiveness increase when the ability of firms to produce and sell increase and the ability of people to demand also increases, otherthings remaining constant. A lower cost and price increase competitiveness and productivity and a higher cost and price would decrease competitiveness and productivity because it might reduce supply and demand and prices employment and demand further. In short, to increase competitiveness and productivity it is important to reduce cost of production, capital and labour costs are managed by the central bank through interest rate to incentivize or disincentivize businesses while following the objective of full employment and price stability. However, the price of labour or wages are determined by the demand and supply of labour in the economy and are indirectly managed, we do not have any institution to decide wages in the labour market, the central bank indirectly manages demand and employment and wages through the borrowing cost. The central bank manages demand and supply, both, through the borrowing cost, therefore it is important to keep the borrowing cost low to achieve the objective of price stability and full employment, borrowing cost too add to the cost of the economy and prices which could be lowered to increase demand and supply, both, different names of the same economic activity. When the borrowing cost is lowered it increases employment which increases supply by increasing production and also increase demand by increasing employment and wages, therefore it is not plausible to view demand and supply as separate from each other as both are functions of the money supply and the borrowing cost. Employment is important for demand and supply which determines the price level, higher employment or full employment means full demand and supply and stable prices and vice versa. The central bank usually overlooks this aspect when increasing the borrowing cost, it views that it is controlling demand to tame prices, but forgets that it would also reduce supply and employment and demand, both. Moreover, it misses to increase supply which has a positive correlation with lower borrowing cost and prices and demand. Lower borrowing cost and prices could help increase the demand and supply upto full employment after which lower borrowing cost would also help imports and contain the prices. Notwithstanding, if the central bank tries to contain either demand and/or supply through the borrowing cost it would affect businesses negatively with swings in the trade cycles, but if the central banks try to adjust the borrowing cost low and stable it would help sustain demand and supply at full employment. Lower borrowing cost and prices would help increase employment, (real) wages and savings and investment. The central banks are waiting for wage inflation after full employment because relative prices due to the lower borrowing cost compared to wages would go down. By keeping the borrowing cost low the banks might allow real wages and demand to go up which may help contain demand, supply, employment and prices. The lower borrowing cost could help increase competitiveness if wages are increasing. History has seen less periods of wage inflation than commodity inflation. Paul Krugman is largely true when he says that the central banks are confronted with a novel situation when they are expecting wage inflation instead of commodity inflation like oil price inflation in the past. No central banks in the past have tightened explicitly due to wage inflation which could be good for demand and supply. Higher wages could increase the supply of labour and demand, but how fast that is a question. Higher wages could increase the population rate of growth or immigration or just imports which is also favourable for domestic and global growth and demand.