The economics of employment and growth looks upside down3 min read 22 Mar 2023, 11:20 PM IST
Textbooks in economics link growth with employment, which sounds logical
Textbooks in economics link growth with employment, which sounds logical. Keynesian theory says that as a government spends money to alleviate unemployment, incomes would rise, leading to consumption and then investment, which through the multiplier effect would raise economic growth. Higher growth, thus, goes along with high employment. As an extension, the Phillips Curve showed that as employment rose beyond a point, inflation would result. The Friedman-Phelps theory argued that something called the ‘natural rate of unemployment’ exists and cannot be escaped in the long run. As central banks expand money supply to spur growth, it would lead to inflation while growth will increase marginally. Wages would increase in response, with job cuts and unemployment to follow. So monetary policy can’t always foster growth and employment together.