Jobless Recovery: A Necessary Evil?

Lately, there has been plenty of worry concerning the so-called ‘jobless recovery’ in America. While the fortunes of American firms have been looking up, there hasn’t been anything near the proportionate increase in employment that many expected. Instead, American firms have proven to be reluctant to hire, preferring to make their workers slog out longer hours. The result has been that employment levels are actually slightly lower now than they were 12 months ago when the U.S. broke free from the recession. While many lambast these firms for crippling the recovery, I believe that, in the long-run, the U.S. will be thankful that they didn’t rush to hire new workers.

The key reason why I hold this view is the theory of neo-classical economics. Neo-classicals (also known as free-market economists) believe that long-run aggregate supply can only be increased (i.e. an outward shift in the LRAS curve shown top) if the quantity or quality (productivity) of labour is increased. From the population graph above, it is clear that, since the 1940s, America’s population has grown by about 25 million every decade. Assuming that its population is currently 300 million (for the sake of using a round number), an increase of 2.5 million in one year equates to a paltry 0.83% rise. Clearly, this figure for the percentage increase in population will only diminish as the ‘base population’ gets larger. If productivity remains unchanged, it follows that the U.S. would only grow at 0.5-1% every year from here on in – a pathetic growth rate compared with the double-digit heights currently achieved by emerging giants like China.

Hence, it is clear that the U.S. will not be able to increase its output (by shifting the LRAS curve outward) by relying on population increases alone. With this in mind, the neo-classical economic theory outlined above dictates that increasing productivity is the only way to go. It is for this reason that I believe that the increase in American productivity that we are witnessing is a good thing as it will allow output to rise and keep up with demand, preventing inflationary pressure in the long-term.