labor term paper

8/22/2019 Labor Term Paper

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Behttina Kim M. Barrios Mr. George Villasis

3e4 Labor Economics

Do Economic growth and employment have an effect on Unemployment?

Summary:

This paper seeks to determine whether employment and economic growth have an effecton unemployment rate. Okuns law explains the positive relationship between economic growth

and employment rate. It states that as the growth economy goes up, products or output will

increase thus it will have a higher demand for products. To make it happened the firm mustincrease their employment of workers to catch up with the growing demand of products. In

contrast, growth slowdowns coincide with rising unemployment because of lesser demand for

products or any goods or services. This can be supported by the fact that the demand for labour

or any other productive resource, Is a derived demand. This mean that the demand for labourdepends on, or is derived from, the demand for the product or services it is helping to produce.

Introduction:

During the early stages of the most recent economic recovery, there has been a much

discussion regarding the relationship between economic growth and employment which is also

known as Okuns law which can be said to have an effect on unemployment rate. Unemployment

rate the percentage of the total labour force that is unemployed but actively seeking employment

and willing to work. Output, the most important concept of macroeconomics, refers to the total

amount of goods and services a country produces, commonly known as the gross domestic

product. Macroeconomists have come to agree that when the economy has witnessed growth

from period to period, which is indicated in the GDP growth rate, unemployment levels tend tobe low. This is because with rising (real) GDP levels, we know that output is higher, and, hence,

more labourers are needed to keep up with the greater levels of production. Employment rate is

the percentage of the labour force that is employed. The employment rate is one of the economic

indicators that economists examine to help understand the state of the economy. The number of

jobs being created can signify whether an economy is improving, overheating, or waning. In his

1962 article, okun represented two empirical relationships connecting the rate of unemployment

to real output, which have become associated with his name. According to it, there is a positive

relationship between economic growth and employment rate and there is a negative correlation

between unemployment and employment. Okuns two relationships arise from the observation

that more labour is typically required to produce goods and services within an economy. More

labour can come through a variety of forms, such as having employees work longer hours or

hiring more workers. To simplify the analysis, okuns assumed that Unemployment rate can

serve as a useful summary of the amount of labour being used in the economy .according to

Edward S. Knotek, Okuns law is usefull for policymakers and economists. The evidence

suggests that Okuns relationship between changes in the unemployment rate and output growth


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has varied considerably over time and over the business cycle. Nevertheless, Okuns relationship

can still be useful as a forecasting tool--provided that one takes its instability into account . A

high rate of unemployment, okun reasoned, would typically be associated with idle resources in

such a circumstances, one would expect the actual rate of output to be below its potential. A

very low rate of unemployment would be associated with reverse scenario.

Findings:

Okuns law coefficient across countries and time

Country 1960-1980 1981-2003

United states 0.39 0.39

United kingdom 0.15 0.54

Germany 0.20 0.32

japan 0.02 0.12

*Introduction to Macroeconomics, okuns law across countries, P 198

The table explains the negative correlation between GDP growth and unemployment rate.

The coefficient states the effect on the unemployment rate deviation of output growth. A value

of of 0.39 tells us that output growth of 1% above normal growth rate for 1 year decreases the

unemployment rate by 0.39%. the coefficient depend in part on how firms adjust their

employment in response to the fluctuation in their production.

Dependent Variable: UER

Method: Least Squares

Date: 02/04/10 Time: 14:08

Sample(adjusted): 2000:1 2005:2

Included observations: 22 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C 20.42267 4.089669 4.993723 0.0001LOG(GDP(10)) -7.125031 2.644181 -2.694608 0.0139

R-squared 0.266349 Mean dependent var 9.531818Adjusted R-squared 0.229666 S.D. dependent var 3.336863

S.E. of regression 2.928720 Akaike info criterion 5.073516

Sum squared resid 171.5480 Schwarz criterion 5.172701

Log likelihood -53.80867 F-statistic 7.260913

Durbin-Watson stat 2.275999 Prob(F-statistic) 0.013941

With the negative coefficient of GDP (-7.125031), it shows the inverse relationship

between unemployment rate and GDP growth rate. With the probability of 0.0139 which it less

than 0.05, it proves that relationship is significant and that GDP can affect the unemployment

rate.


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figure 1.1 inverse relationship between Unemployment rate and GDP growth rate

Conclussion:

With the following finding that we came up, we can definitely say that as a relationship

between changes in the unemployment rate and growth, okuns law predicts that the growthslowdowns typically coincide with rising unemployment. There is a strong and positive

correlation between GDP-growth and the change in employment. But employment, of course,

will rise only if economic growth rates are outstripping productivity gains because as we know

that if the output increases which means that there are high demand of the goods and servicesthat they provide, firms will hire more workers to compensate for the increased demand. There

is an increase in employment because labor is a derived demand. There is a negative correlation

between changes in employment and unemployment, but certainly not 1:1. An increase in laboursupply tends to raise employment and dampen productivity increases significantly. Similar to

these increases in labour supply is the effect of high unemployment rates. An increase in

employment, of course, does not imply a reduction in unemployment of the same amount. Abetter labour market situation will attract workers who had no job before because high

productivity of firms entails employment to those who are not currently working or jobless.

Bibliography:

BOOK

Blanchard, Olivier, Introduction to Macroeconomics, fourth edition, pp. 186-191.

JOURNAL


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Ewal Walterskirchen

The relationship between Growth, Employment and Unemployment in the UE

September 1999, Barcelona Spain

William Seyfried, Winthrop University

Examining the relationship between employment and economic growth in the ten largest

states

WEBSITE

www.nscb.com

www.neda.com
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labor term paper

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