Supply Side Employment Growth

Some of my supply side friends are probably perturbed with me for my view that, while their model may be appropriate for normal times, Keynes is relevant during a period of inadequate demand. In fact, I view his General Theory as a guide for getting out of a recession or liquidity trap. The focus now should be on getting the sum of consumption spending, investment spending, government spending and exports minus imports (C, I, G, and X-M) to a level sufficient to promote growth and full employment. Or, looking at it another way, get the product of money growth times income velocity to such a level.

But, while employment growth needs adequate aggregate demand growth to spur the demand for labor, the supply of labor is also important. In fact, if you ask me what the level of employment will be five or ten years from now, I would probably ignore demand factors and focus on supply factors such as the expected growth in the labor force due to demographics and factors affecting the labor force participation rate. As long as willing and able unemployed people want to work, they will beat the bushes to find it. In other words, the supply of workers will shift to meet the demand, although probably at slightly lower wage rates.

Employment won’t be greater than the number of potential workers willing and able to work, and competitive forces will operate to keep it from being much less. In other words, the willing unemployed will work hard to become employed, whether it means relocating, changing jobs, changing careers, or working out of the garage. There will probably always be some frictional unemployment even in good times, but individual incentives on the supply side will keep pressing for employment individually and toward full employment collectively. Just remember, supply and demand includes supply.

Comments (1)

Trackback URL | Comments RSS Feed

  1. W.C. Varones says:

    So keep running deficits at 10% of GDP until something good happens?

    I think that is likely to cause something bad to happen instead.

    I don’t think Keynes even contemplated structural deficits of this magnitude.