Weakened Link between Output and Jobs Makes Higher Deficits a Necessity

Michael Stephens | April 10, 2013

In the LA Times, Dimitri Papadimitriou explains that the link between growth and employment has been steadily weakening over the last several decades, and that this makes getting help from fiscal policy — increasing the deficit in the short run — more urgent than ever.  If we want to get back to pre-crisis unemployment rates (below 4.6%) anytime soon, the private sector isn’t going to be able to do it on its own, and certainly not with payroll tax increases and indiscriminate budget cuts weighing down already-insufficient growth rates:

While we are seeing some economic growth, the unemployment rate is not responding as strongly to the gains as it did in the past.

This slow job growth — today’s “jobless recovery” — isn’t an outlier. It’s a phenomenon that has been increasing over the last three decades, with jobs coming back more and more slowly after a downturn, even when GDP is increasing. The weak employment response has been an almost straight-line trend for more than 30 years.

Our institute’s newest econometric models show that each 1% boost in the GDP today will create, roughly, only a third as much improvement to the unemployment rate as the same 1% rise did in the late 1970s.

Read the op-ed here.

For more on this broken link between output and jobs, the background research can be found here.

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One Response to “Weakened Link between Output and Jobs Makes Higher Deficits a Necessity”

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  1. Comment by Tyler HealeyApril 12, 2013 at 11:00 am   Reply

    “Ideally, fiscal policy should be countercyclical. Such a policy would provide stimulus in the form of tax cuts or increased spending to soften recessions and speed recoveries, and then move the budget balance toward surplus to prevent overheating during periods of high employment.” – Ed Dolan

    The modern money army is growing!

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