The US economy is finally growing rapidly enough to boost employment. Still, a great deal of the expected surge may come in the form of further gains in productivity while employment lags behind. Productivity growth is usually welcomed as a sign of economic strength, but under these circumstances, its implications are negative for the spread of economic benefits from producers to the general population.

It is widely said that firms are reluctant to hire labor on a large scale because of economic uncertainty, and that would be normal in the early stages of a recovery. But there is another major deterrent to hiring which is larger this time, and that is the increasing burden of government spending that the government expects the private sector to shoulder.

Under Keynesian economics wherein government spending is alleged to be stimulative; and that in fact, in the US, a recent speech by Larry Summers, the White House economics chief, is already giving credit for the coming recovery to the Obama administration’s aggressive “stimulus” spending. However,
Classical economics makes much more sense: the resources the government gains when it spends deplete the resources that producers in the private sector need to invest in the creation of jobs. So the government cannot increase employment in the unhealthy sectors where it spends without a loss of employment in the healthier parts of the economy which are forced to pay for the spending. With this in mind, expect that sustainable growth rate of the US and euro economies to be less in the next ten years than in the last ten.

In the meantime, US economic growth continues accelerating out of its slump. Expect more impressive output growth figures ahead. The rebound is likely to continue until the economy re-achieves its pre-recession output level. There should be large employment gains as well, but a significant part of the output growth will be in the form of continued increases in productivity. The same condition extends to the continent. That’s because economic uncertainties, technological development and the costs of funding a vast increase in government deficits, are pushing employers toward smaller workforces. As a result, unemployment rates are unlikely to fall back to levels that existed before the financial crisis, and are likely to remain elevated indefinitely.

This means a dangerous widening of the gap between haves and have-nots. It also intensifies the vicious circle whereby national government is pushed toward more deficit spending to placate the losers in the game. Finally, the attempt to fund this spending on the back of the business sector cuts private-sector jobs.

Luis de Agustin