Any claim that a policy for trade, 'competitiveness' or exports will create jobs is normally wrong
The current buzzword in policy discussion seems to be ‘jobs’n’growth’. Any policy which has an economic impact is being sold as good for jobs’n’growth.
When so many products are marketed with the same unique selling point, how are voters to know which policies really will remove stubborn unemployment and bring the sparkle back to the economy?
The concatenation of jobs and growth is in part due to a lazy assumption that anything which increases growth creates jobs. In part it is a result of ambiguity in what we mean by growth.
TTIP, the transatlantic trade and investment partnership, a trade deal currently in negotiation between the EU and the US, os a good example of policy makers and economists saying different things.
According to a House of Lords report, ‘both the European Commission and the UK government have identified ‘jobs and growth’ as the overriding purpose of concluding a TTIP agreement’.
But economists know that trade deals do not increase employment – nor do they raise the rate of growth.
For example, Paul Krugman, whose Nobel prize was for work on trade economics, made the point many years ago.
“Most US businesspeople believe that trade agreements … are good largely because they mean more jobs around the world,” he wrote in the Harvard Business Review.
“However, economists in general do not believe that free trade creates more jobs worldwide or that countries which are highly successful exporters will have lower unemployment than those which run trade deficits.”
To support its policy the European Commission has produced an impact assessment. This report makes no claim that TTIP would increase the number of jobs. That should not be surprising, since the document draws on research by the Centre for Economic Policy Research (CEPS), a think tank staffed by economists who know better.
Nor does the impact assessment claim an increase in the growth rate but only a small increase in GDP in the longer run. CEPS economists estimated that a very ambitious version of TTIP could add a half of one percent of GDP after ten years.
This is a slightly higher estimate than similar studies have produced, and it assumes an agreement which goes beyond current aspirations; but a half of one percent is small enough.
Can a small bump to GDP count as growth? Dani Rodrik, a well-known development economist, argues that ‘the standard gains-from-trade argument is one about levels, not growth rates’.
The difference between a half percent increase in the level of GDP and a half percent increase in growth is huge.
Suppose EU GDP was to grow at 2 per cent a year for the next 10 years. At the end of that period GDP would be 22 per cent higher without TTIP and 22.5 per cent higher with TTIP.
On the other hand, if growth increased by 0.5 per cent to 2.5 per cent then GDP would be 28 per cent higher after 10 years.
Frequently, policy-makers’ claims for growth exploit an ambiguity in the term. It can mean growth in actual GDP, which is the total of all goods and services produced in a year. This is the GDP which Eurostat and the Office of National Statistics measure.
There is also potential GDP which is the output that would be possible if all capital and labour are fully employed. In the absence of full-employment, actual GDP will be below potential GDP.
Potential GDP normally grows steadily over time due to the accumulation of capital, increase in the workforce and improvements in productivity, for example due to better technology.
Growth in actual GDP depends also on the level of effective demand in the economy and fluctuates as demand rises and falls over the economic cycle.
The link between jobs and growth is strongest when we talk about demand. In a recession falling demand reduces both growth and jobs, while during the recovery rising demand is a prerequisite for job growth.
The economic theories of the benefit-of-trade relate to potential GDP. Trade deals can increase the level of potential GDP but higher potential GDP does not guarantee that actual GDP rises.
There would also need to be sufficient demand. The obvious conclusion is that TTIP cannot be a solution to recession or depression. Any politician who promotes TTIP as a way out of the current depression is seriously misguided.
This also explains why the impact assessment makes no claims about increasing jobs. The approach economists take to identifying the effect of such a policy is to compare the economy at full-employment before and after.
TTIP is just one example of policy-makers making spurious promises about jobs and growth. The explanation on TTIP might help to spot other false promises attached to other policies.
Firstly any claim that a policy for trade, ‘competitiveness’ or exports will create jobs is normally wrong. As with TTIP there may be new jobs in some sectors but overall the level of employment will not be affected.
Secondly, supply-side policies, those usually labelled as reform, are aimed at improving potential GDP. Claims that they will help tackle unemployment or offer a solution to recession are equally unlikely.
By contrast, if the economy is below full-employment then policies which stimulate demand are the only ones which will increase employment and bring the growth rate back to its trend.
Increasing public and private investment works; tax-cuts are less effective but easier to implement; and raising wages works when inflation is low.
If the economy is at full employment then increasing the number of jobs means increasing the size of the pool of labour, for example schemes to bring back people who have dropped out of the labour market, schemes for childcare to enable parents to seek work and immigration all support job growth.
The next time someone uses the jobs’n’growth slogan to sell you a policy, ask yourself: is this about demand or is it false advertising?
Jos Gallacher is a Brussels-based economic development professional
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