The EU

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Wednesday, March 5, 2014

Jobs and Economic Growth

For John, BLUFWe need to have an expanding economy for job creation.  Nothing to see here; just move along.

From the World Bank we have a paper than looks at the question of economic growth and job creation.  Twenty pages with references.  The authors are Kaspar Richter and Bartosz Witkowski.

Does growth generate jobs in Eastern Europe and Central Asia?.  Below is the executive summary (the underlining is mine):

Summary:  In Eastern Europe and Central Asia, the link from growth to jobs was tenuous in the first decade of the transition, giving rise to the notion of jobless growth.  Yet, European countries suffered large job losses during the recent recession, suggesting that jobs and growth are closely entwined.  This study takes a new look at this issue. It provides a cross-country analysis of the employment intensity of growth over the last decade and a half in Eastern Europe and Central Asia, which includes the 11 Central and Eastern European countries that joined the EU since 2004, the countries of former Yugoslavia, the Countries of Independent States and Turkey.  The authors compare these findings with other regions in the world. The paper shows that the responsiveness of employment to output increased in the second decade of the transition.  It also finds that in some instances employment growth increases with reforms of labor and product markets, stronger macroeconomic policy frameworks, better governance, and more economic integration and diversification.
The last sentence shows that nothing is ever simple, especially in economics.

This raises the point of how essential economic growth is to recover in European and elsewhere.  Among the points that have been neglected here in the US, probably because of domestic partisan politics, has been the need for economic growth to generate jobs.  An economist recently noted that the break even figure for new jobs created in the US per month is about 250,000 (that does not account for getting long-term unemployed back into the formal job market).  Thus the relevance of the World Bank paper above, which considers whether or not economic growth generates jobs in Eastern Europe and Central Asia (it does).

The question then is what generates economic growth.  The fundamental answer is that increasing efficiency of resource use across the economy (allocational efficiency) sustained over time.  If the policies that generate domestic growth are in place an economy also tends to attract foreign investors as well.

A key indicator is the share of Gross Domestic Product allocated to the central government (total central government revenues as a percent of total GDP).  Growth starts being constrained when that percentage gets into the high ‘teens (somewhere beyond 17-18%).  For highly industrialized economies it can go up to the low 20s without creating too many problems.

The other thing is that job growth is not just about keeping the ratios the same.  Real job growth is about adding more people to the work force, about reducing the number of adults who are not working.  It is about opening opportunities to more people.  Sometimes that means the end of old industries and jobs and the creation of new industries and jobs.  This means that the legal structure of a nation has to allow for new ideas (and new approaches to old problems) to be birthed and for people to be able to bring new products to market.  It also means that what is old must move into a new phase.  Buggy whips haven't disappeared, but they have become a niche market.  Thus, less buggy whip makers, but more folks making radiator caps and other things, both related to automobiles and to other things.  For example, if we didn't have an airline industry, would the manufacturers of airplanes, the people on the line, be making buggy whips instead.  I don't think so.  We need innovation and the legal system to allow it to appear.

I could be wrong here but I am with those who think that having a job gives some meaning and dignity to life.

Regards  —  Cliff

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