The Evidence that Growth Creates Jobs: A New Look at an Old Relationship

IMF Blog, November 9, 2016

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Canonical URL: The Evidence that Growth Creates Jobs: A New Look at an Old Relationship

Publication: iMFdirect
Date: November 9, 2016
Theme: Re-examination of the link between GDP growth and labor market outcomes using Okun’s Law.

Okun’s Law: Higher growth leads to lower unemployment; economists use it to track the relationship between jobs and growth.
New IMF research documents striking variation across countries in how employment responds to GDP growth over the course of a year.
In some countries, a pick-up in growth causes employment to rise and unemployment to fall; in other countries the response is muted.
A pick-up in growth—through a stimulus to the demand side of the economy, for instance increased government spending on infrastructure—will result in more jobs.

Group of Twenty (advanced and emerging economies) examined: these economies together account for the lion’s share of global GDP and employment.
United States: Okun’s Law holds overall, but the relationship between unemployment and growth since 2011 deviated from the historical pattern because the depth and duration of the great recession (the period following the global crisis in 2008) led to many more people losing their jobs.
High employment response examples:
- South Africa, Australia, and Canada: a 1 percent increase in GDP is matched by an increase in employment of 0.6 percent or higher.
Low or negligible employment response examples:
- China, Indonesia, and Turkey: virtually no response of employment to growth.
Contribution of GDP growth to employment variation:
- Canada and the United States: GDP growth accounts for over 70 percent of the variation in employment.
- Russia, the United Kingdom, and Australia: GDP growth accounts for about 40 percent of the variation in employment.
- Many other countries: GDP growth accounts for very little of the variation in employment.

Reported unemployment rates may not fully reflect the true unemployment rate in some countries.
Rapid structural change: unemployment may be driven by longer-run structural trends rather than short-run fluctuations.

Both demand and supply policies are needed—“you can’t have one without the other.”
- Demand-side: ensure sufficient demand so firms see sales improving and increase capacity and hiring.
- Supply-side: implement measures so output gains are sustainable; examples include removing bottlenecks in the power sector and undertaking labor and product market reforms.
- Public infrastructure spending: strong case for increasing spending on public infrastructure to provide a short-term demand boost and help supply.
Use all policy tools—monetary, fiscal, and structural—to maximize growth within countries and amplify impact through coordination across countries.
A “three-pronged” approach (monetary, fiscal, structural) would free up more policy space—more room to act—than is commonly assumed.

Source: The Evidence that Growth Creates Jobs: A New Look at an Old Relationship, iMFdirect, November 9, 2016.

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