All Financial Wisdom
How Much Does a Country Have to Grow to Stimulate Employment?
What is the rate of growth from which you begin to create employment? Should the economy grow at 3% per year or is it only necessary for it to grow at 1%? These are quite common questions in any economic talk that has unemployment as a substantive issue. However, they are not at all easy to answer, although there are some theories about it.
In times of economic prosperity, citizens don’t worry whether the economy grows too much or too little. It is usually enough for most people to appreciate an improvement in their quality of life. However, unemployment always matters. For this reason, it seems particularly interesting to analyze the growth that a country must experience to generate employment.
If we observe what has been happening during the last two or three decades, we can verify that, indeed, economic growth is closely related to employment. In general, there are few discrepancies among economists about this circumstance and it is assumed that the growth of the economy is in itself a means to increase the number of employed persons in any country.
It is important to emphasize that, normally, to produce more, more people are needed who are working. However, this relationship does not have to be fulfilled in all cases. The possibility of producing more without the need to increase employment also exists, which leaves a little questioned the fact that employment is a consequence of economic growth.
Think, for example, of a company that replaces all its machines with more modern ones or that improves its production processes to increase production without increasing the number of employees. We are talking about an increase in productivity that generates more production but no more employment. Similarly, the issue of the robots taking over human jobs has been on everyone’s mind lately.
Growth and employment: a close relationship according to Okun’s Law
When trying to relate growth and employment, it is inevitable to do so without recourse to Okun’s Law, proposed in 1962 by the North American economist Arthur Okun, who observing the data of the past discovered a fairly close relationship between the growth of an economy and its unemployment rate .
According to Okun, to maintain the employment levels of a country, it was necessary that its GDP grow every year at a rate between 2.6% and 3%. He pointed out that any growth below this figure translated into an increase in unemployment due to the improvement in productivity.
In addition, the Okun Law states that once the level of employment was maintained thanks to the 3% annual growth, if it was intended to reduce unemployment it was necessary to grow two percentage points more, for each point of unemployment that one wants to reduce. The law has been fulfilled in most cases, so it is generally accepted among economists.
However, it is important to point out that this is not a true economic theory, but only an observation made by this economist that has not been able to be proven 100%. Not in vain, Okun was based on the 50s in the United States and warned that his theory would only be met when the employment rate is between 3% and 7.5%.
From what growth are we going to create employment in the coming years?
Everything seems to indicate that the exact percentage of growth needed to generate employment depends on the period and circumstances of the country in question.
Today, the opinions of experts on how much we have to grow to generate employment differ: some speak of a fork between 1% and 1.5%; while others raise it up to 2%. However, it is important to emphasize that it is one thing to create employment and another to reduce the unemployment rate. To achieve the latter, it is clear that this effort must be greater and the GDP growth rate should exceed 3%.
Our economy has been growing steadily and markets are up. Some give credit to the Obama administration, while others call it the Trump effect. Will this sustained growth continue? Stay tuned.