What is MacroWeb?

Is Full Employment the Answer?

As we recover from the recent recession, current Democratic Presidential Candidates voice concerns that, although we just had the largest quarterly real GDP growth in 19 years, the unemployment rate is still high. Is the recent growth going to last, or are we still in bad shape? Does full employment improve our standard of living, or are there larger factors in standard of living improvement?

The main determinant of standard of living is, surprisingly, not a low unemployment rate. Productivity, usually measured by output divided by hours worked, is the largest factor in improving the standard of living. Increased productivity fuels increases in "physical capital, higher quality of labor and capital, and improvements in how labor and capital are combined (Kennedy, 103)." A small increase in productivity, even 0.7 percent, can have a significant increase in our standard of living over the space of a few decades. (Kennedy, 101). So, if increasing productivity is the key to helping us feel better and get more stuff, what should the politicians be worrying about? To increase real GDP growth, political leaders should adopt fiscal policies that encourage investments and increases in savings, subsidies for retraining programs and development of technical schools, and tax incentives for research and development. Why don't they do this? 0.7 percent is perceived as a small and unimportant number, and its effects take a long time to surface, so it is very hard to get reelected on this type of platform.

Recently, productivity has moved from a 1.5 percent annual increase over the past two decades to a whopping 3.2 percent annual increase in the past eight years (see Kudlow). What caused this increase? Economists agree that this increase is mainly attributed to the technology boom, especially in the information technology sector. New tools such as the Internet, and the availability of cheaper hardware and software has made it possible for business and industry to become much more productive, effectively reducing the labor force needed.

Can this increase in productivity be sustained, even with a high unemployment rate? The answer is, of course, no. The fact is, that the recent increase in productivity was also spurred by the low unemployment rate we experienced in the late '90s. It is possible for the nation's economy to be better off with a low unemployment rate with a slight tradeoff in productivity. The real key is to sustain the productivity rate we currently have, and reduce the unemployment rate at the same time.

It is true, that a large workforce is vital to economic growth. In conjunction with this, the quality of work and how much work is being done by the workforce is what really helps us get more and better stuff. If productivity is up, growth will increase, which in turn will make room for more and better jobs.

For more information on how productivity has increased our standing of living, go to http://www.dallasfed.org/fed/annual/1999p/ar97.html.

Works Cited

Kudlow, Larry, "Rising to the Occasion, Amazing productivity is the key to this new growth cycle" www.nationalreview.com, 6 Nov. 2003.

Kennedy, Peter. Macroeconomic Essentials, Understanding Economics in the News, 2nd Edition. Massachusetts Institute of Technology, 2000.