Since the seventies problems in the labor market have presented a serious challenge to policy markers. Unemployment tends to rise in a downturn but barely falls in the upswing. Each year the manufacturing sector sheds jobs, and unemployment is on the increase, even when the economy expands. Nonetheless, the close link between the labor market and the goods market has not been broken. The false impression that employment changes are rather independent of output changes arises basically for one reason: every year there are technical and organizational innovations which raise productivity; therefore, the economy must expand by 2 percent just to preserve the number of jobs in the economy. In the manufacturing sector the pressure to rationalize is particularly great. To sustain the level of employment, output needs to grow by 4½ percent per year. Since this is rarely the case, employment in manufacturing has been falling for many years; this trend is likely to continue into the future. Over the last two decades nothing has changed with regard to the tight relationship between economic growth and employment. The employment intensity of growth has not diminished; in other words: given the same rate of economic growth, productivity advances are just as high as in earlier periods. To be sure, the manufacturing sector has been characterized by a surge in productivity over the last two years, but this phenomenon reflects the recession rather than a long-term trend. The battle against unemployment is rendered difficult not so much by the acceleration in productivity growth, but by the relatively low long-term growth and the high increase in labor supply. If economic growth can be accelerated by 1 percentage point, employment will rise by 0.4 percentage point (some 12,000 persons). The effect of increases in the labor supply has often been underestimated: even though the average age of retirement has fallen rapidly, the supply of persons active in the labor market has risen by at least 1 percent per year over the last fifteen years, with almost half of the increase due to the inflow of foreign workers. Therefore, a rate of economic growth of 3 percent would be needed to stabilize the rate of unemployment in the long term. This relation certainly also reflects structural imbalances. The rise in unemployment has been especially pronounced in manufacturing. In the service sectors and in the construction industry many new jobs were not filled with the unemployed but with people from the "hidden reserve" and from abroad. The steep rise in labor supply explains why unemployment has changed so little, even though employment has reached higher and higher levels. To lower unemployment, higher economic growth or a reduced increase in the labor supply is needed. The possibilities of reducing unemployment through an increase in the labor intensity of growth are, as recent experience shows, rather limited.
Wachstum und Arbeitslosigkeit; Growth and Unemployment
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