Why do we need 3% economic growth to keep unemployment stable? – Part 1

I like to think of myself as not too stupid. When I don’t understand something, I like to dive into that.

  • Sometimes I learn new facts that help me make sense of what seemed like disparate and nonsensical data points.
  • Sometimes I learn what I thought were facts were not.
  • Sometimes I learn new theories of the world.
  • Sometimes I decide those theories are nonsense and the reason I didn’t understand the thing in the first place is that it makes no sense.

Searching out areas where I feel confused or uncertain is a useful way to figure out how to move forward. I try to shield from public view when these areas of uncertainty are to do with economics. But no more.

I believe we need high growth to keep unemployment stable. But I’ve never really understood why.

My economics education was a good one. But I never did honours – let alone a PhD – and it was a long time ago. They didn’t teach us everything, and I’ve forgotten plenty.

This is my way of saying I don’t know everything about economics. (Despite how obvious it is this is weirdly hard for me to type.)

What I’m doing here then, is going on a learning expedition. Trekking deep into territory that has been explored, but not by me. Maybe along the way I’ll learn something. Maybe even have some insights that are new to me. Maybe even have some insights that are new!? Most likely I will discover everyone else already knew something I didn’t.

This is part 1. I’m expecting to be able to put together a few more parts over coming days as I learn a bit on this topic. But for now, I’m going to write about a few of the preconceptions I have that give me the idea this is an important question to pursue.

  1. My sense is if the Australian economy saw population growth and productivity growth drop to zero it would have growing unemployment. But basic economic equilibrium theories would suggest that doesn’t happen. Why wouldn’t all the firms just produce the same again next year, using the same workers?
  2. My guess is that growth has in the past come largely from population growth. Which is weird. It suggests adding new people to the population / labour force creates so much new demand that it props up not only their own job but other people’s jobs too.
  3. The global population is growing fast. But it may stop doing so within our lifetimes. At that point, population growth will stop contributing to economic growth. If population growth causes econ growth causes employment, the end of pop growth could be the end of employment.  That’s a nasty scenario. We may have to choose between the limits of the planet or the employment of its workforce.

At the least this will be a quick two part series where I explain the answer in part 2 and am forced to revise the first thing I said in this post. ;)

Please leave any helpful comments or suggested reading for me in the section below. I’ll write more soon.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

4 thoughts on “Why do we need 3% economic growth to keep unemployment stable? – Part 1”

  1. I guess people who study this have the answers but I wonder about the following
    – With people living longer, doing less manual work, having fewer children and increased opportunities for female participation in the job market and population growth there must be more people available to work every year.
    – A portion (how large I wonder) of these people are available for work at the right price/conditions but otherwise stay out of the job market.
    – There would be I assume a long-term trend for people to stay in education longer (also influenced by the job market) which might balance things out along with Australian’s working overseas.
    – A lot of technological improvements are hard to measure because they are new jobs offerring services that never existed in the past – or there are improvements to the service that never existed before – for example a journalist has access to more data or accurate facts and writes a better story – but not more copy.

    Liked by 1 person

  2. The last point got jumbled – it should be
    – A lot of technological improvements are hard to measure because they are new jobs offerring services that never existed in the past – or there are improvements to the service that … existed before – for example a journalist has access to more data or accurate facts and writes a better story – but not more copy.

    Liked by 1 person

    1. I like it Michael. I would add another one.

      What does the increase in the velocity of employment mean? People are increasing the number of jobs they have and the diversification of those jobs over their lifetimes.

      Like

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