How can higher unemployment be a sign of growth

In the study under discussion,there is a causality analysis between the current account deficit, inflation problem and growth [ 2 ]. The study [ 3 ] Brazil, Russia, India, using annual data for the period — belong to China and Turkey, the panel analyzed the causal relationship between the current account deficit and inflation method. The relations between Azerbaijan, Kazakhstan, Kyrgyzstan, Macedonia and Turkey for the period — using data on inflation and unemployment with panel cointegration analyze and causality tests [ 4 ].

They are studied causality and vector error correction model between inflation, economic, growth and unemployment in North African Countries [ 5 ].

In the study the inflation and economic growth are taken for Nigeria with regression analysis. They studied the inflation, economic growth, unemployment relationship with Var analysis for Iraq. In this study, the relationship between the current account deficits, economic growth and the current account with certain explanations are wanted to examined [ 6 ].

The last part of our chapter we determined the relationship between the current account and the growth rate and they were explained with the national income inequality and the nature of this relationship was discussed in Turkey. When we look at these relations in terms of causality, it is stated that the direction of the relationship in question will yield different results when viewed as asymmetric and symmetrical and should be adapted accordingly to their economic policies.

The relationships between macroeconomic variables in an economy and the reciprocal interactions of these variables are crucial to policy proposals. The intervention was deemed unnecessary because it was assumed that the economy would always reach the full employment balance thanks to its spontaneous, intrinsic mechanisms at the time of the classic-neoclassical paradigm.

However, the Great Depression system in has shown that it is insufficient to solve many problems such as especially unemployment and furthermore problems become deeper than before.

It can be said that the Classic-Neoclassical paradigm is also in crisis with the publication of the General Theory which Keynes expressed his views about the crisis. Microeconomic analyses which examine the optimum distribution of resources in neoclassical theory were replaced by the analysis of macroeconomic variables such as employment, national product, total lack of demand in the post-Keynes period, and analysis of interactions between these variables.

This study led to a long discussion of the relationship between inflation and unemployment and the effectiveness of its policies to be implemented. Reflecting the views of neoclassical Synthesis Keynesian economists, the original version of the Phillips Curve shows the relationship between the rate of increase of nominal wages in the UK between and , i. Phillips said the hypothesis that the change in monetary wage rates the rate of change of money wage rates is determined by the level of unemployment and the rate of change of unemployment can be generally accepted.

These conclusions are of course tentative. There is need for much more detailed research into the relations between unemployment, wage rates, prices and productivity [ 8 ]. Paul Samuelson and Robert Solow examined the relationship between inflation and unemployment by substituting the Consumer Price Index in the United States instead of the wage rate, and thus developed a new interpretation in This interpretation, also called the Phillips Curve, which has been modified and improved has gained great importance in the literature and has become meaningful in terms of economic policy in this way.

The Philips Curve shows the inverse relationship between the unemployment rate with the inflation rate, compatible with the Keynesian approach, high inflation rate, low unemployment rate and low inflation with high unemployment rate means that a choice can be made between combinations of. The stagflation process, called the combination of rising inflation and unemployment, was seen after the oil crisis.

This situation has led to questioning and discussion of the stable relationship between prices and unemployment [ 9 ]. The fact that the stagflation phenomenon that emerged in the late s could not be explained by Phillips Curve Analysis intensified the debate on the Phillips curve durin this period. Under the fine-tuning policy, for example, if the government wants to reduce unemployment, it must increase total demand.

However, it is necessary to endure some inflation increase with increasing total demand. According to Friedman and Phelps, the economy does not stabilize after the inflation rate rises. Because if the adaptive expectations approach is valid, when inflation rises, inflation-related expectations also rise. In other words, the Phillips curve shifts to the right and unemployment returns to its natural rate again.

In such a case, it is possible to reduce unemployment below its natural level with ever-increasing inflation. In this context, Friedman suggests that the stable relationship between unemployment and inflation is due to differing expected inflation and realized inflation rates.

When the expected and current inflation rates are the same, there will be no change in real wages and hence the level of employment. Because in this case, the expected inflation rate will be reflected in long-term wage contracts [ 11 ].

Friedman specifically emphasizes here that the temporary trade off relationship is due to false expectations about inflation that lead to rising inflation. In the long term, as a result of the revision of inflation expectations, the exchange relationship disappears and the curve becomes perpendicular to the horizontal axis [ 12 ].

According to neoclassical synthesis Keynesian economists the Phillips curve is negatively sloped that means there is an exchange between unemployment and inflation whereas the Monetarist economists argue that is only true in the short term.

In contrast, the new classical approach suggests that the Phillips Curve is a right perpendicular to the horizontal axis both in the short run and long run. According to the new classical analysis, according to rational expectations, unemployment always remains at the level of natural unemployment, except for unforeseen shocks and random errors under the assumption that there will be no systematic error in the forecast of inflation.

In other words, there is no relationship between unemployment and inflation. Since inflation is the same as expected inflation in rational expectations approach, current income is always at the level of natural income and unemployment is also at the level of natural and natural unemployment. It is possible to deviate from the natural level of unemployment if the inflation estimate is incorrect. The fact that the economy is always in balance at the natural level of unemployment means at demand-side policies are unnecessary.

According to The New Classical Macroeconomics theory, which has Monetarist views at the point of origin, the conjuncture policy is ineffective. With monetary policies, it is not possible to increase production and employment levels even in the short term.

The existence of a relationship between unemployment and inflation, that is, tradeoff between these two variables or not is important for policy proposals. The Keynesian economists argue that if there is an exchange between unemployment and inflation, it is possible to achieve the desired result with the demand-side policies to be implemented.

In this context, expansionary monetary and fiscal policies will lead to demand expansion, resulting in unemployment reduction, while demand-biased inflation increases will occur. On the contrary if it is necessary to lower inflation, the shrinking policies that will be implemented require some amount of unemployment to be endured. In contrast, the Monetarist and new classical economists, who represent the orthodox approach, suggest that these two variables are independent of each other and that demand-side policies will have no effect on them.

In this approach, which argues that inflation is always a monetary phenomenon the public intervention in the economy with cyclical policies will have unnecessary and negative consequences. The below mentioned Figure 1 shows the relationship between the unemployment rate and the inflation rate in Turkey. According to the chart, there is an inverse relationship between the unemployment rate and the inflation rate in general. In the period studied, the rate of increase in prices is low or vice versa during periods when unemployment rate is high in Turkey.

This can be seen as a result of expansionary monetary policies implemented in developed countries to counter the negative effects of the crisis on unemployment. As with other developing countries, capital inflows have accelerated with the increase in money supply in the global dimension.

Intensive capital inflows can be said to have an effect that reduces unemployment by providing a high growth rate. This period occurs for the inflation and unemployment rising together and points to stagflationist developments.

Relationship between unemployment rate and inflation rate — Figure 1 shows that the rate of unemployment and inflation rose by 4 and 7 percentage points respectively in the period — Therefore, while it is possible to talk about the existence of a relationship between inflation and unemployment rate in the short term, it is observed that there is no exchange between the two variables in the long term. In other words, it is predictable that the expected impact of policies aimed at lowering the unemployment rate on inflation will be limited or short-term.

Similarly, policies aimed at price stability should be expected to have a limited and short-term impact on unemployment. One of the highlights of the analysis on unemployment is the relationship between growth and unemployment. The main expectation of given the main determinants of economic growth is the unemployment rate decreasing in an economy where the growth is occurring or at the least the current unemployment rate does not increase.

In this context, the effects of economic growth on employment or unemployment rate are examined and whether growth creates employment is the subject of research both in the world literature and in Turkey [ 1 ]. Historically, it is observed that the relationship between economic growth and employment has weakened or, in other words, become more complex in recent periods.

Economists who supported the structural adjustment policy predicted that employment would increase with the liberalization of foreign trade, which is the basis of the export-based growth strategy. What many developing countries have experienced in recent years is far from confirming these claims of neoclassical theory. In order to ensure adequate employment in an environment where the working age population is increasing at a high pace, growth must be sustained as well as high growth rates.

The fact that the growth figures in Turkey have been below minus six percent three times since the s shows that the growth has been extremely unstable. This indicates that the growth due to short-term foreign capital inflows is not permanent and its fragility is high with the liberalization of capital movements [ 15 ]. Arthur Okun examined the relationship between the unemployment rate and economic growth in the United States by regression analysis using quarterly data for the period — According to the developed regression equation, the difference between current income and full employment income varies in the opposite direction with the unemployment rate [ 16 ].

The law developed by Okun states that if the growth rate exceeds the trend or average growth rate measured at 2. Exactly, the question of how much e ach percentage point of GDP growth that exceeds the growth trend will lower the unemployment rate is being sought.

The Okun law can be expressed by the following equation;. This ratio varies from country to country. In the years in which the economy performs growth above the natural rate, there will be a change in the unemployment rate to k times the difference between the actual and natural growth rate. Accordingly, the relationship between growth and unemployment for the United States can be written as:. Data covering the period — showed that unemployment decreased by 0.

Figure C shows the changing share of newly employed workers transitioning from out of the labor force in the last three decades. Figure C Share of newly employed workers who transitioned into employment from being out of the labor force in the previous month, Dec. Source: U. Further, in their working paper , David Blanchflower and Adam Posen of the Peterson Institute for International Economics have found that the downward pressure on wages stemming from adults not in the labor force but in effect part of the pool of workers competing for jobs has increased significantly after relative to the 10 years before.

Both of these measures—the quantity-side measure of how many new jobs are filled by those from out of the labor force and assessments of how much downward wage pressure is exerted by those not in the labor force—indicate that workers out of the labor force are more substitutable for the unemployed than they were in the past. It is by now well recognized that the relationship between the unemployment rate and wage growth is different in recent years than it has been in the past.

Part of this divergence is likely due to genuine structural changes in the economy, particularly the degraded bargaining power and leverage of typical workers due to policy choices. But some of the divergence is likely simply because a given unemployment rate is not providing the same signal about labor market tightness over time due to compositional changes in the workforce and difficulties in deriving an aggregate unemployment rate from a household survey.

It is worth noting that many of these issues that blur signals from the unemployment rate will apply to other quantity-side measures of labor market slack, like the prime-age employment rate. Finally, the line between the officially unemployed versus potential workers currently classified as not in the labor force has become ever muddier over time. All of this implies that policymakers—particularly those at the Fed—must continue to be extremely modest in how well they think they can forecast coming wage and price pressure stemming from unemployment.

Instead, they should let the data speak and worry about wage and price pressure when it comes—and not rely on historical relationships between unemployment, wages, and prices to make policy going forward. Working Economics Blog. Posted January 31, at pm by Josh Bivens. The late s is an obvious reference for highlighting how unresponsive wage and productivity growth have been to low unemployment in recent years.

In these years, low unemployment coincided with notable accelerations in both wage and productivity growth. In this newsletter, we highlight some reasons why the headline unemployment rate measured in the late s does not provide quite the expected apples-to-apples comparison with the unemployment rate of today.

Key findings are: The unemployment rate that signifies labor market tightness falls as the workforce gets older and becomes better educated. All else equal, a workforce that is growing older and more educated should steadily, over time, reduce the unemployment rate that is consistent with a given wage target.

These compositional changes in the workforce have occurred and have reduced unemployment by roughly 0. Growing nonresponse in the survey used to calculate the unemployment rate has reduced the unemployment rate consistent with a given wage target over time by another 0.

Growing evidence shows that nonresponse to this survey is not random: rather it is jobless workers who are less likely to respond to the survey that is used to calculate unemployment. This biases the measured unemployment rate downward. Using quarterly GDP and unemployment data, they found that the Great Recession generally increased the size of Okun's coefficient relative to an average historical recession.

Further statistical tests, however, indicated that the increases in Okun's coefficient during the three most recent U. The study by Ball, Leigh and Loungani also confirms that Okun's coefficient did not change significantly during the Great Recession. This is evident by careful examination of the second panel of Figure 1.

The red triangles do not appear to be distributed much differently than the others. Okun's coefficients one for expansion and one for recession were similar for different business cycle phases even across these periods: The estimated coefficient during expansions was 0. These results indicate that there was no clear difference in Okun's coefficient during different stages of the business cycle. Similarly, the estimated Okun's coefficient during the past three recessions was 0.

These estimates are not significantly different from those of all past recessions. International studies of Okun's law have found that Okun's coefficient can vary substantially across countries. This variation could be used to test theories about what determines the magnitude of Okun's coefficient. We could also examine the variation in Okun's coefficient by state. Indeed, according to economist Donald G. Freeman, "Using regional data to measure Okun's coefficient … has the potential to uncover geographic differences in the responsiveness of labor markets to changes in output.

For example, variation across states can reflect differences in industrial mix e. State-level analysis also has the advantage that national fiscal and monetary policies are essentially the same across states. Two previous studies of Okun's law using regional data suggest that there may be differences in the regional estimates of the coefficient.

One of these studies, by Blackley, estimated Okun's law for 26 states in the U. In this study, he found Okun's coefficients ranged from 0. Blackley then took Okun's coefficients and examined whether there were underlying factors that could explain the differences across states.

He found that the differences were related to three factors: the state's industrial mix, labor force and level of personal income tax. Specifically, he found that increases in the share of gross state product GSP, the state-level equivalent of GDP attributable to the manufacturing sector and increases in a state's personal tax rate would increase Okun's coefficient. Thus, the unemployment rate is more responsive to changes in output in states that have a higher percentage of income from manufacturing and that have high personal taxes.

Blackley also found that states with younger residents and more women in the labor force had lower Okun's coefficients. A similar study by Freeman in used annual data for the eight geographic regions defined by the Bureau of Economic Analysis for the time period.

Freeman found that the values of Okun's coefficient ranged from 0. Thus, a 1-percentage-point increase in the growth rate of a region's GSP corresponded to an 0. Unlike Blackley's, Freeman's analysis of the factors that could influence the variability in the regional estimates indicated that "there is no obvious pattern to interregional differences in the magnitude of the Okun coefficients.

Our estimated value of the coefficient for the nation was 0. Blackley's study used only 26 of 50 states, and Freeman's study aggregated the states into regions, both of which limit the analyst's ability to determine whether state-level characteristics demographics, state fiscal policy, etc. We estimated Okun's coefficients for all 50 U. The accompanying map shows the variation in the estimates of Okun's coefficients for the states.

Each colored pattern represents a range of values for Okun's coefficients; these values range from 0. Further, we estimated a national-level Okun's coefficient at 0. The largest values of the state-level Okun's coefficients were found for South Carolina and Illinois, at 0. The map indicates that these states, along with Alabama, California, Michigan, Ohio and Pennsylvania, had Okun's coefficients that were larger than that for the U.

That means that in those states the unemployment rates were more highly correlated with the growth rates of their GSP. Perhaps surprisingly, all other states had unemployment rates less correlated with the growth rates of their GSP. Some states—for example, North Dakota 0. These states are shown in a red checkered pattern. In these states, when the growth rate of GSP rose, the unemployment rate was just about as likely to rise as it was to fall.

Some of these states may have had relatively low correlation between output and unemployment because of large transitory fluctuations in either unemployment or output growth.

For example, Louisiana may have had less correlation in its unemployment and output relationship because of the high incidences of natural disasters, such as hurricanes. Alaska, Louisiana and Wyoming had the highest percentage of their state income attributable to the energy sector.

Large fluctuations in energy prices may have affected their income disproportionately, breaking the correlation between the unemployment rate and GSP. Are there common factors that determine the magnitude of Okun's coefficients for different states?

We did find some regional clustering in the size of the coefficient.