<p>Recall that central banks use interest rate to control inflation by inducing spending or saving  with decrease or increase in interest rate.</p>

<p>Also,note the theory proposed by the short-run <a href="https://en.wikipedia.org/wiki/Phillips_curve" rel="nofollow noreferrer">Phillips curve</a>.</p>

<p><a href="https://i.sstatic.net/pKDUK.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/pKDUK.png" alt="enter image description here"></a></p>

<p>Though this graph has <a href="https://economics.stackexchange.com/questions/18814/testing-the-long-run-phillips-curve-contradicting-empirical-results"> some controversy</a> in terms of its empirical soundness. It is the basis of how we tie interest rate to unemployment.</p>

<p>abstractly you can think of it as a "causal chain" being:
$$\text{interest rate}\rightarrow\text{savings rate}\rightarrow\text{spending}\rightarrow\text{inflation}\rightarrow\text{unemployment}$$</p>

<p>Hope this helps.</p>

CC BY-SA 4.0
2020-04-07T16:26:58.847Z
I would say, after checking your link, that you are not alone in questioning the P. curve. In general, I think the thing is dead.
123
CC BY-SA 3.0
2018-01-17T17:19:58.057Z
2018-01-17T17:19:58.057Z
EconJohn
<p>A utility-based rationale leads to the conclusion that the savings scheme <em>reduces</em> unemployment. The argument goes as follows:</p>

<ol>
<li>The savings scheme reduces worker's consumption of goods and services;</li>
<li>A decrease in consumption means workers perceive lower utility for their work; </li>
<li>Lower utility encourages retirement, especially among those who are close to (or past) retirement age;</li>
<li>New retirements translate to an increase in vacant positions;</li>
<li>Therefore, unemployment goes down.</li>
</ol>

CC BY-SA 4.0
2018-06-16T20:56:47.590Z
2018-06-16T20:56:47.590Z
Iñaki Viggers
<p><em>Simplifying assumption:</em> workers aren't currently saving as much as 10%, so this program actually increases the savings rate.</p>

<p>In the long run we'll see a shift in the composition of economic activity. There will be less money going into current consumption (e.g. I'm less likely to go to the movies this week), but more going into investment (e.g. I'm more likely to get a small business loan to help me start a new business). This means short run losses for some industries (movie theaters, cars--businesses selling things for consumers to enjoy right now) but gains for others (machine shops, B2B services--business selling things that help us build/invest in new stuff).</p>

<p>I would expect a short run increase in unemployment as this structural shift occurs. A boat salesman is going to lose his job, and it's going to take some time for him to find a new job selling accounting services to businesses. </p>

<p>In the long run, unemployment rates should go back to something like the previous normal, although as Iñaki Viggers points out, there will also be changes in labor force participation. All else equal, labor force participation should decrease. </p>

CC BY-SA 4.0
2020-04-07T13:44:05.690Z
2020-04-07T13:44:05.690Z
Rick_Weber
<p>You need to connect it to the injections, withdrawals and to the output gap in the Keynesian Cross model. 
As savings increase, planned withdrawals increase in the economy. Consumption decreases, unexpected inventory pile up takes place. Hence firms reduce production and total output is reduced. As output falls unemployment will be more and hence the central bank is going to reduce the interest rate to improve the situation and boost consumption and production.  </p>

CC BY-SA 3.0
2015-11-29T01:19:44.683Z
2015-11-29T01:19:44.683Z
Sub-Optimal
<blockquote>
  <p>The country of Kingsland is considering the introduction of a
  compulsory retirement saving scheme. Under this scheme all workers are
  required to save ten per cent of their annual wages and salaries until
  they retire. Use the supply and demand model (and a diagram) for
  saving and investment to explain the likely effects of this scheme on
  national saving, investment and the real interest rate in Kingsland.
  Explain the effects on employment of the saving scheme. (You can
  assume that Kingsland is a closed economy).</p>
</blockquote>

<p>Since the level of national savings has increased, I understand how the savings curve shifts to the right and thus decreases the real interest rate and increases the levels of savings and investment in the economy. I am unable to understand how I can relate this back to the level of unemployment in the economy.</p>

CC BY-SA 3.0
2018-02-17T22:17:25.617Z
Disclaimer: I am not a macro expert by any means. How I usually think about these things is if you scales everything down to something that is easier to grasp. If I am saving money, that means I purchase fewer good, which means the store is selling less, making less profit, purchasing fewer products from their suppliers etc etc., which I would assume results in less jobs (since no one is buying) = unemployment goes up.
ssn
<macroeconomics><interest-rate><investment><unemployment><saving>
Relationship between Real Interest Rate and Employment
GaramMasala
# Relationship between Real Interest Rate and Employment

(Asked by: username_0 on 2015-08-23)

> The country of Kingsland is considering the introduction of a
> compulsory retirement saving scheme. Under this scheme all workers are
> required to save ten per cent of their annual wages and salaries until
> they retire. Use the supply and demand model (and a diagram) for
> saving and investment to explain the likely effects of this scheme on
> national saving, investment and the real interest rate in Kingsland.
> Explain the effects on employment of the saving scheme. (You can
> assume that Kingsland is a closed economy).

Since the level of national savings has increased, I understand how the savings curve shifts to the right and thus decreases the real interest rate and increases the levels of savings and investment in the economy. I am unable to understand how I can relate this back to the level of unemployment in the economy.

**Tags:** macroeconomics, interest-rate, investment, unemployment, saving

> **Comments:**
> **username_1**: Disclaimer: I am not a macro expert by any means. How I usually think about these things is if you scales everything down to something that is easier to grasp. If I am saving money, that means I purchase fewer good, which means the store is selling less, making less profit, purchasing fewer products from their suppliers etc etc., which I would assume results in less jobs (since no one is buying) = unemployment goes up.  

---

## 4 answers

### Answer by username_2 on 2018-01-17. Score: 1

Recall that central banks use interest rate to control inflation by inducing spending or saving with decrease or increase in interest rate.

Also,note the theory proposed by the short-run [Phillips curve](https://en.wikipedia.org/wiki/Phillips_curve).

[![enter image description here](https://i.sstatic.net/pKDUK.png)](https://i.sstatic.net/pKDUK.png)

Though this graph has  [some controversy](https://economics.stackexchange.com/questions/18814/testing-the-long-run-phillips-curve-contradicting-empirical-results) in terms of its empirical soundness. It is the basis of how we tie interest rate to unemployment.

abstractly you can think of it as a "causal chain" being:
$$\text{interest rate}\rightarrow\text{savings rate}\rightarrow\text{spending}\rightarrow\text{inflation}\rightarrow\text{unemployment}$$

Hope this helps.

> **Comments:**
> **username_3**: I would say, after checking your link, that you are not alone in questioning the P. curve. In general, I think the thing is dead.  

---

### Answer by username_4 on 2018-06-16. Score: 0

A utility-based rationale leads to the conclusion that the savings scheme *reduces* unemployment. The argument goes as follows:

1. The savings scheme reduces worker's consumption of goods and services;
2. A decrease in consumption means workers perceive lower utility for their work;
3. Lower utility encourages retirement, especially among those who are close to (or past) retirement age;
4. New retirements translate to an increase in vacant positions;
5. Therefore, unemployment goes down.


---

### Answer by username_5 on 2020-04-07. Score: 0

*Simplifying assumption:* workers aren't currently saving as much as 10%, so this program actually increases the savings rate.

In the long run we'll see a shift in the composition of economic activity. There will be less money going into current consumption (e.g. I'm less likely to go to the movies this week), but more going into investment (e.g. I'm more likely to get a small business loan to help me start a new business). This means short run losses for some industries (movie theaters, cars--businesses selling things for consumers to enjoy right now) but gains for others (machine shops, B2B services--business selling things that help us build/invest in new stuff).

I would expect a short run increase in unemployment as this structural shift occurs. A boat salesman is going to lose his job, and it's going to take some time for him to find a new job selling accounting services to businesses.

In the long run, unemployment rates should go back to something like the previous normal, although as username_4 points out, there will also be changes in labor force participation. All else equal, labor force participation should decrease.


---

### Answer by username_6 on 2015-11-29. Score: 0

You need to connect it to the injections, withdrawals and to the output gap in the Keynesian Cross model.
As savings increase, planned withdrawals increase in the economy. Consumption decreases, unexpected inventory pile up takes place. Hence firms reduce production and total output is reduced. As output falls unemployment will be more and hence the central bank is going to reduce the interest rate to improve the situation and boost consumption and production.


---

