by Stephan Smith on February 12, 2011

If you are wondering what an employer is, then here is where you want to be. Why? Because on this page I will be explaining what an employer is and its role in an economy. The term ‘employer’ is one of those terms that many people have a basic understanding about, but many may not have any understanding as to its role in helping an economy grow. It’s a given, employers are very important to an economy; just like how employees are also very important. Each depends on one another; for you cannot have one without the other. So just what is an employer? Open your mind and get ready to learn.

What is an Employer?

An employer is an entity that has labor and thus contracts a laborer, also known as an employee, to work that labor. The labor in question can be anything, from physically intensive duties like farming, construction and landscaping to knowledge intensive duties like such in the medical, computer science and engineering fields. An employer is one that provides labor to laborers. The end result of an employer contracting or hiring an employee is newly created goods and services for an economy. Which leads me to my next point.

An employer is a good thing for an economy. They are producers of goods and services through the help of employees. Employers are also responsible for increasing demand for goods and services indirectly through their employees. Understand? Well, let me expound on what I just said. Employers are indeed producers because through them additional goods and services are created, with the help of the employees they hire.

Employers also help raise the demand for goods and services indirectly through their employees and thus helps an economy grow. When an employer compensates its employees, usually with currency, which is the most popular form of money, those employees now have the ability to purchase goods and services. If more individuals become employed and thus become employees of an employer, then more individuals will have money to spend on goods and services.

That means there will be an increase in demand for goods and services since more people can afford them. As we know, if demand goes up, then over time overall prices goes up as well. Please note that I am maintaining the assumption that the supply of those goods and services to an economy remains stagnate or a least increases at a slower pace than demand. Check my article about supply and demand for more information about the subject.

I hope you understand what I am trying to convey. The more employees employers hire, the more demand there will be for goods and services because more individuals (who are employees) will have more money to spend. With more money available to employees, the more they are likely to spend. With companies making more money on the sales of their goods and services, the more likely they are to hire more employees to deal with the additional business; and so the economy grows even further.

And with a growing economy, its only a matter of time until inflationary pressures start to built; the money that is being used in the economy will start undergoing the effects of inflation. That’s when the economy’s central bank steps in to enact contractionary monetary policies to fight off inflation and throw the economy into disinflation. When contractionary monetary polices are put into place, money will become harder to get a hold of and as a result, consumers start buying less goods and services. With consumers cutting back on their spending, producers (or businesses, who are the employers) will have to start cutting back on the number of employees it hires. Producers may even consider letting go of already hired employees if consumers cut back in spending enough to merit that course of action.

Here’s a recap. Employers are very important to an economy because it is through their actions where more goods and services are made available to the marketplace and it is through employees, which employers hire, to whom money is given through their work. With more money in employees’/consumers’ possession, more money is spent on goods and services and as a result, the economy grows. But ultimately, it is the central bank of that economy that holds the power, for they control whether an economy grows or not.

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