GROWTH AND UNEMPLOYMENT
You often hear social democrats, or people further from the left, whine about that there's to
much focus on economical growth and too little on unemployment. The evil neo liberals has taken
over the agenda, they say, and it's time to do something about it. One might wonder who these neo
liberals are, but that's not the issue for this article.
What they want to do is focus on bringing unemployment down instead of just trying to make the economy
grow. The methods would generally have to do with spending public money (either on hiring people or on
supporting companies in trouble) and laws making it very difficult to fire people from work.
And all this may seem sensible. After all, making sure that people work and can provide for themselves
is great, isn't it? Well, it is. But the methods aren't. And in reality, there's no long term conflict
between increasing growth and bringing down unemployment.
In economics you have to separate what happens in the short run from what happens in the long run. Usually,
populist politicians only focus on the effects of their policies in the short run, as voters seem likely
to buy into what they're promising and not worry about what will happen in the long run. And the long run
isn't all that long - what we're talking about is somewhere between five years and a decade.
Now, this focus on the short run wouldn't be so bad as long as the economic policies promoted doesn't hurt you
in the long run. The problem is that they generally do. A rule of thumb is that if something has good effects
in the short run, it'll have stronger bad effects in the long run. The opposite is also generally true (that is,
if something has bad effects in the short run it'll have stronger good effects in the long run). Basically, this
means that a policy that would reduce the unemployment in the short run would have costs in the long run that are
higher (and would probably result in increasing the unemployment).
The first set of measures is to spend tax money on getting people jobs either by supporting failing companies
or by hiring more people in the public sector. This doesn't work, and the reason is that the tax money is mostly
taken from consumption (whether directly through VAT or indirectly through virtually any other kind of tax, possibly
with the exception of taxes on saving). Consumption is what provides producers with income, and thus consumption is
what finances employment (simplified, but still true). This is fairly obvious if you think about it, but that
doesn't prevent it from happening all the time. Frederic
Bastiat, a French economist, understood this and explained the mechanics of it in an essay (follow the link) in
1848, so one could expect people to know this.
This means that if you boost employment by increasing tax and spending that money on hiring people, you'll certainly
reduce unemployment in the short run. In the long run, however, your measures will cost you in consumption, which means
lower growth, which means that the private sector can employ fewer people, which means that you'll end up with less tax
money to spend on hiring people. So, using the first set of measures is not a good idea. This does not mean that you
should never employ people in the public sector - it just means that you shouldn't do it to boost employment.
In economy there's something called the natural rate of unemployment, in which the economy is in balance. In the long
run the economy will always move towards this rate. Basically the rate gets higher if there is little competition on the
markets and if wages are high. This explains why the second set of measure - making it difficult to fire people - doesn't
really help in the long run either. This is usually done by strenghthening the unions in various ways. Basically, making
it hard or costly to fire people, and having strong unions, will lead to wages going up, and because unemployment is dependent
on wages, it will also rise.
Following the simple (and somewhat simplified) examples given above, it's easy to see why growth should be the focus, because
even though it may in the short run lead to increased unemployment, in the long run it will help lower it. If politicians
(and voter's I guess) studied some fundamental economic theories, we just might have been a little better off.
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