Correlation Between GDP Change and Employment Rate Research Paper

Correlation between GDP change and employment rate is one of the major issues economics deals with, and one of the greater reasons for debates among various schools of economic theory. It may be even said that it is one of the defining aspects of any theory.

According to Keynesian economic theory, GDP and employment rate are in a cyclic interdependent relation. When the cycle is at its peak and the production rates grow rapidly, businesses try to hire as many workers as it is possible to maximize the output, thus effectively increasing the employment rate and decreasing unemployment. In the course of time, however, if GDP grows too fast, it may lead to price inflation, because free workers grow more and more scarce and businesses have to bid against one another for their services. On the contrary, during the low periods of economic cycle, the GDP decreases and firms tend to get rid of surplus workers because they have no reason to keep production rates high, and it results in unemployment. This whole construct is the reason why Keynesian theory suggests control and regulations imposed on labour market from outside (e.g., trade unions, taxation, minimum wage law and other kinds of interventions), stating that it is the only way to save the economy from catastrophic changes threatening its stability.

There is at least one other point of view, most notably expressed by the Austrian school of economics. According to it, the relation between GDP and employment is far less direct; that is, they are still connected, though not in the way of influencing each other, but in the way of being caused by one and the same reason. Austrian school believes that market’s laws and mechanisms, its “invisible hand”, are the only things that can effectively regulate both GDP and employment rates – that is, the economy left without outside intervention will always correct itself, bringing the supply and demand of labour to balance. The business boom-bust cycle is, therefore, caused not by the natural tendency of the market itself, but by its reaction to unnatural outside influence, that is, by the intervention of government striving to increase both GDP and employment rate. Government regulations, however, generally have results that are opposite from what they intend to achieve. For example, let’s take minimum wage law and unionisation – at a glance, they seem to be created to protect the labour. In fact, however, nothing can be further from truth. This law does not make the employer hire workers at a minimum wage rate. It precludes him from hiring those willing to work for less than this rate, thus effectively creating unemployment. Trade unions belong to the most fervent proponents of the law, and it is quite natural. Your average union member earns much more than minimum wages, and the reason for him to protect the law is because it protects his interests, eliminating from competition all those who are willing to work for lesser wages. As it is seen, according to this theory both GDP and employment rate changes are caused by distortions created by the outside influence on the activity of the market.

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There are other economic theories, proposing their own reasons for changes in GDP and employment, but all we want to say here is that each of the answers to the question has its own supporters with their own proofs. What to choose is up to an individual.

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