How Can Both The Economy And Unemployment Grow

Economic Growth With Low Unemployment: Lessons From Fast

Can the U.S. economy grow faster now that we are at 4.4 percent unemployment? The experience of fast-growing communities in the Pacific Northwest suggests that we can keep growing, but not too rapidly.

Total economic growth depends on two factors: growth of jobs, and growth of productivity, or output per worker. This article will address the first issue, whether jobs can continue to grow with low unemployment.

Several metropolitan areas in the Pacific Northwest have reached the 4.5% unemployment mark, and they all continued to grow since then.

Seattle-Tacoma is the largest example. In June 2016, unemployment fell to 4.5 percent thanks to job growth at 3.2 percent. In the most recent data, unemployment has dropped even further, to 3.5 percent as job growth continued strong. Boise also continued its fast employment growth well after unemployment reached 4.5 percent. Their unemployment rate is now just 3.2 percent.

Seattle-Tacoma job growth compared to U.S.

Bill Conerly using BLS data.

Portland is an example of a community that slowed after unemployment dropped. In February 2016 the metro area hit the 4.5 percent unemployment level, thanks to 3.3 percent job growth. They now have just 3.5 percent unemployment, but job growth has dropped to 2.1 percent . That is still a pretty good pace, but not as strong as a year ago. Salem and Couer dAlene also slowed their growth rates, but unemployment still dropped after the 4.5 percent threshold was crossed.

Missing Deflation Post 2007

Events following the 2007-2009 recession have again called into question how well economists understand the relationship between the unemployment gap and inflation. As a result of the global financial crisis and the U.S. 2007-2009 recession, the unemployment rate rose above 10% and remained significantly elevated compared with estimates of the natural rate of unemployment for multiple years, as shown in Figure 1. The natural rate model suggests that this significant and prolonged unemployment gap should have resulted in decelerating inflation during that period. Actual inflation did decline modestly during that period, decreasing from an average rate of about 2% between 2003 and 2007 to about 1.4% on average between 2008 and mid-2015.25 However, based on previous experience with unemployment gaps of this size and inflation forecasts based on the natural rate model, many economists anticipated a more drastic decrease in the inflation rate, with some predicting negative inflation rates reaching 4% during that period.26 The movements of the unemployment rate and inflation rate after the financial crisis are displayed in Figure 2.

How Has The Natural Rate Shifted Over Time

Understanding the relationship between the current unemployment rate and the natural rate is important when designing economic policy, and the fact that the natural rate can shift over time further complicates the design of economic policy. As shown in Figure 1, the estimated natural rate of unemployment has been relatively stable over time, shifting from a high of 6.3% in the late 1970s to about 4.8% in 2016, a spread of only 1.5 percentage points.17 The major inflection points seen in the natural rate over time are largely the result of changes in the makeup of the labor force and changes in productivity growth over time.

As shown in Figure 1, the estimated natural rate slowly increased in the late 1950s, 1960s and the early 1970s. Several economists have suggested that much of this increase in the natural rate, from about 5.4% to close to 6.3%, was due to the large number of inexperienced workers entering the labor force as members of the baby-boomer generation began looking for their first jobs.18

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Arthur Okuns Findings On How Economic Growth And Unemployment Relate

• The Bottom Line

When it comes to studying the economy, growth and jobs are two primary factors economists must consider. There is a clear relationship between the two, and many economists have framed the discussion by trying to study the relationship between economic growth and unemployment levels. Economist Arthur Okun first started tackling the discussion in the 1960s, and his research on the subject has since become known as Okuns law. Below is a more detailed overview of Okuns law, why it is important, and how it has stood the test of time since first being published.

Financial Frictions In The Wake Of Crisis

Alternative explanations for the lack of deflation after the 2007-2009 recession cite the global financial crisis and decreased access to external financing for businesses. Typically, during a recession, as demand for goods and services decreases, the price of those goods and services also tends to decrease. However, some economists have argued that the financial crisis decreased the supply of external financing available for businesses, which increased borrowing costs. In the face of increased borrowing costs, some businesses, especially liquidity constrained businesses with so-called sticky customer bases,30 would have opted to raise prices to remain solvent until the costs of borrowing decreased as the financial sector recovered. Limited empirical work has found evidence of this behavior by businesses during the 2007-2009 recession, and therefore may help to explain the unexpectedly modest decrease in inflation following the recession.31

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Globalization And The Global Output Gap

Over the previous several decades, the U.S. economy has become more integrated with the global economy as trade has become a larger portion of economic activity. Economists have suggested that as economies increase their openness to the global economy, global economic forces will begin to play a larger role in domestic inflation dynamics. This suggests that inflation may be determined by labor market slack and the output gap on a global level rather than a domestic level. Since the 1980s, trade has expanded significantly in the United States, increasing from less than 20% of GDP to more than 30% of GDP between 2011 and 2013.

According to the International Monetary Fund, the average output gap following the 2007-2009 recession among all advanced economies was smaller than the output gap in the United States, as shown in Table 1. In 2009, the actual output among all advanced economies was about 4% below potential output, whereas the actual output in the United States was about 5% below potential output. If increased trade openness has subdued the impact of the domestic output gap on inflation in favor of the global output gap, the smaller output gap among other advanced economies may help to explain the unexpectedly modest decrease in inflation after the 2007-2009 recession.

Table 1. U.S. Output Gap and Average Output Gap Among Advanced Economies

International Monetary Fund, World Economic Outlook Database, April 2016.

There Are Many Reasons For Unemployment Underemployment And Underpayment In An Economy

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Rebuttal To The Phillips Curve

During the 1960s, economists began challenging the Phillips curve concept, suggesting that the model was too simplistic and the relationship would break down in the presence of persistent positive inflation. These critics claimed that the static relationship between the unemployment rate and inflation could only persist if individuals never adjusted their expectations around inflation, which would be at odds with the fundamental economic principle that individuals act rationally. But, if individuals adjusted their expectations around inflation, any effort to maintain an unemployment rate below the natural rate of unemployment would result in continually rising inflation, rather than a one-time increase in the inflation rate. This rebuttal to the original Phillips curve model is now commonly known as the natural rate model.8

How To Reduce Unemployment In South Africa

South Africa has a high rate of unemployment, there are many people who are not working. And they cant provide for their families. These is not good for the economy, when people are not working , the economy is no longer stable. How to reduce unemployment in South Africa? we must come with strategy that will help us to reduce unemployment in our country. People must have skills so that they will able to develop themselves in our country. Skills that we have can help us to create something that will help our society.

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Limitations To Fiscal And Monetary Policies

The natural rate model suggests that government’s ability to spur higher employment through fiscal and monetary policies is limited in important ways. Expansionary fiscal and monetary policies can be used to boost gross domestic product growth and reduce unemployment, by increasing demand for goods and services, but doing so comes at a cost.

According to the natural rate model, if government attempts to maintain an unemployment rate below the natural rate of unemployment, inflation will increase and continuously rise until unemployment returns to its natural rate. As a result, growth will be more volatile than if policymakers had attempted to maintain the unemployment rate at the natural rate of unemployment. As higher levels of inflation tend to hurt economic growth, expansionary economic policy can actually end up limiting economic growth in the long run by causing accelerating inflation. The impact of inflation on economic growth is discussed in the “Inflation’s Impact on Economic Growth” section below.

As discussed earlier, the relationship of unemployment to the natural rate of unemployment is used as a benchmark to determine when there is either a positive or negative output gap . Alternative measures could be used to indicate an output gap, however, the literature surrounding this topic has largely found using the unemployment gap to be a reliable measure of the overall output gap.42

Inflation’s Impact on Economic Growth

How To Grow An Economy

One of the problems that I think is plaguing the modern economics and political economy discussion is that as economics professors we have mistakenly ingrained into our students some rules-of-thumb that are coming back to haunt us.

Principle among these is, we dont live to work, we work to live.

The idea here is to communicate that ultimate goal of economic production is to raise folks standard of living, by which we mean their level of consumption.

This is an important insight but it leads to the following confusion. Folks see that our current economic climate is bad. They sort of equate this with our standard of living as having fallen and then they conclude that something must be impeding our ability to produce things.

When I say, no, its really just our ability to buy things. If we could buy more things the economic climate would improve dramatically. And, to buy more things all we need is money.

Then folks, having been taught all to well, come back with you dont buy things so that you can work. You work so that you can buy things.

Here is where that goes wrong.

If you just look at America today, does it really seem like the case that their just isnt enough stuff to be bought? If you had to just walk the streets of America and come up with a list of problems, would lack of material goods and services for sale be on that list?

The difference is important.

A concern may go like this:

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Key Concepts And Summary

Cyclical unemployment is relatively large in the AD/AS framework when the equilibrium is substantially below potential GDP. Cyclical unemployment is small in the AD/AS framework when the equilibrium is near potential GDP. The natural rate of unemployment, as determined by the labor market institutions of the economy, is built into what is meant by potential GDP, but does not otherwise appear in an AD/AS diagram. Pressures for inflation to rise or fall are shown in the AD/AS framework when the movement from one equilibrium to another causes the price level to rise or to fall. The balance of trade does not appear directly in the AD/AS diagram, but it appears indirectly in several ways. Increases in exports or declines in imports can cause shifts in AD. Changes in the price of key imported inputs to production, like oil, can cause shifts in AS. The AD/AS model is the key model used in this book to understand macroeconomic issues.

Growth And Current Account Balance

The current account consists of two main items: the first is the foreign trade account showing the export and import of goods, and the second is the export and import of services, called invisible trade . The current account deficit is less than the amount paid for goods produced and sold abroad to be consumed domestically, indicating that a country is making negative savings . The relationship between the current account deficit and growth can be two-way relationship. Firstly the country with insufficient savings ratio or negative savings, the current account deficit can affect growth as investment spending is financed through the use of external savings. Second, as if income growth will increase demand for imported goods, the growth current account deficit may affect growth or may occur as a result of the growth rate itself.

International flows of goods and capital are two sides of the coin and this can be explained by the national income accounting authority as follows :

Figure 3.

Current account balance / GDP and growth rate . Source: OECD.

To summarize it is observed that while growth accelerated when the current account balance in Turkey gave a deficit. The growth slowed when the current account balance gave a surplus. In this context, the ratio of the current account deficit to GDP was 4.7% in 2017, while the same rate rose to 1.1% in 2019. In the same period, the growth rate started to decrease and reached 0.9% from 7.4%.

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Relationship Between Growth Rate And Unemployment: Okuns Law

One of the highlights of the analysis on unemployment is the relationship between growth and unemployment. The main expectation of given the main determinants of economic growth is the unemployment rate decreasing in an economy where the growth is occurring or at the least the current unemployment rate does not increase.

The view that economic growth will lead to increased employment and reduce unemployment is known as Okuns law in the literature. Arthur Okun examined the relationship between the unemployment rate and economic growth in the United States by regression analysis using quarterly data for the period 19471960. According to the developed regression equation, the difference between current income and full employment income varies in the opposite direction with the unemployment rate . The law developed by Okun states that if the growth rate exceeds the trend or average growth rate measured at 2.25%, it will lead to a decrease in the unemployment rate. Exactly, the question of how much e ach percentage point of GDP growth that exceeds the growth trend will lower the unemployment rate is being sought. The Okun law can similarly be used to predict the growth rate needed to reduce the unemployment rate by %1 . The study covering the above-mentioned period for the United States concluded that each %1growth rate over the pre-growth rate reduced the unemployment rate by %0.5 points . The Okun law can be expressed by the following equation

Figure 2.

How Do Economies Grow

1997 Index of Economic Freedom, Kim R. Holmes, Bryan T. Johnson, and Melanie Kirkpatrick, editors .

A few decades ago, policymakers in Washington and other Western capitals believed that they could hasten economic progress in poor countries with extensive aid and investment programs. They encouraged private companies to invest as well, but they believed that only governments could assemble enough capital to jump-start disadvantaged economies.

Much of the money that was poured into those countries, however, went into grandiose but unproductive projects, propping up over-valued currencies and enriching corrupt officials. After dismal failures in Latin America, Africa, and southern Asia, the political will in much of the West has moved increasingly to the opposite strategy of letting poor countries fix themselves. More and more analysts now say that economic freedom is the main driver of economic development. Executives looking for growth opportunities abroad, they argue, should ask the same questions about the investment climate that they ask in more familiar settings: How high are the taxes? What regulations and licenses will we have to worry about? How easy is it to send goods and profits back and forth?

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