Saturday, August 22, 2009

Full Employment and Economic Growth

The majority of the economists hold the view that there is no inherent conflict between full employment and economic growth. Full employment is consistent with 4 percent unemployment in the economy. So the relationship between full employment and economic growth boils down to trade-off between unemployment and growth. Periods of high growth are associated with low level of unemployment and periods of low growth with rising unemployment.
In 1961 Aurther Okun established relationship between real GNP and changes in the unemployment rate. This relation has come to be known as Okun’s law. This law states that “for every three percentage points growth in real GNP, unemployment rate declines by one percentage point every year.
However certain economists argue that unemployment rate increases as the growth rate rises. Economic growth leads to reallocation of resources in the economy where by there is change in the type and quantity of labour demanded. There is a shift in the demand for labour from one sector of the economy to the other. As workers are trained for specific jobs, they are displaced when the demand for the products of particular industries falls. This creates unemployment. This is particularly so when growth is the result of technological innovations which are labour saving and require more qualified and skilled workers. Thus unskilled workers are worst sufferers because they are thrown out of jobs with automation. Employment can however increase with growth if demand is increasing at 3 percent per annum and the productivity is increasing at 4 percent per year, thou put will expand by employment will decline. Under the circumstances the government should adopt such monetary policy which should increase the overall demand in the economy.

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