(An Application of the Seven Major Sources of Economic Progress)
Authors: William Seyfried & Rollins College
- Article Summary
The article ‘Employment Intensity of Economic Growth’ seeks to examine the relationship between economic growth, as measured by the GDP, and employment levels, with the main focus being on the margin countries of Europe known as PIIGS (Portugal, Ireland, Italy, Greece and Spain). It pertains to research done between 1999 and 2012 to study unemployment growth rates and GDP after the financial crisis proved that the peripheral countries were in a dire financial state.
The financial crunch immensely reduced the availability of financing, and hence could not overturn the debts. The public sector took over a substantial amount of private sector debts resulting in a substantial rise of public debt. Subsequently, the increasing interest rates and limited aid forced the peripheral countries to rely on EU/IMF rescue packages. The article makes estimates of employment levels and economic growth, and the consistency of such employment over time in an effort to examine the relationship between the two. It also explores other factors that help to expound on the variances in economic growth between countries.
- Core Economic elements
According to the article, PIIGS countries had a rough time in the early years of the 21st century. There was the introduction of a common currency, the Euro, which was expected to revolutionize the economy of European countries. However, the Euro area as a whole entered in recession in late 2008. The causes of the fall in output varied significantly across euro-area countries. The surplus countries were typically severely affected through their exposure to foreign trade that contracted sharply towards the end of 2008 through a combination of confidence effects and also reliance on excessively strong demand in other countries. However, different countries responded differently to the move. At first there was economic growth experienced by the PIIGS countries but later, they were hard hit by some serious economic hitches, massive unemployment and political insecurity. They began suffering from sovereign debt crisis.
The unemployment intensity of economic growth comes out clearly with values between 0.2 and 0.4 using empirical models to form the estimates. The empirical results explain economic growth in all countries. Greece, Ireland and Italy have similar values ranging from 0.22 to 0.26. Portugal and Spain’s values are slightly higher at 0.37 and 1.45 respectively.
These results go a long way to explain why some countries respond differently in terms of employment and economic growth. From the article, Greece has low relationship of employment to economic growth. Both Ireland and Portugal have persistence in employment growth while Spain has the highest employment elasticity.
Different factors serve to project economic progress. For instance, countries that have a strong legal system have better grounds to maintain a positive economic progress and also a high employment rate due to increased GDP. On the other hand, countries that are marred by political instability at any one time are bound to regress economically translating to low employment rate or decrease in employment due to retrenchment. For the PIIGS countries, political instability played a big role in the deterioration of the economy and consequently the high debt to economy ratio. Eventually, this led to a rise in unemployment.
When countries allow competitive markets in the industry to thrive, there is efficient use of resources and consequently a rise in economic growth. Competition also translates to improved products and services which create an efficient market, and this is bound to improve the economy of a nation and conversely increase employment. However, the type of industry also determines the behavior of the economy. Nations whose economy largely depends on service industries is likely to have high unemployment rates, and this can be attributed to the fact that, for industry based industries, the workers are usually on a contract basis as the industry has high and low seasons. When the economy is strong, companies can hire more workers, and when it declines, the workers are laid off. In such a scenario, employment elasticity is high. On the contrary, nations that support strong unions are likely to have low employment elasticity because there are restrictions in dismissing workers. Nations whose industry revolves around agriculture and manufacturing are likely to have lower unemployment elasticity. The main reason is that economic growth is more stable is such countries.
Regulation policies also have a major effect on the nation’s economy. Countries that have regulations limiting entry into various businesses, and also impose price controls, interfere with natural laws of trade. Their economy is less likely to be vibrant due to the restrictions. It normally happens to nations where political supremacy replaces the rule of law and liberty of contract. In such nations, employment elasticity is likely to be high.
The concept of free trade, monetary stability and low tax rates has a positive effect on the economy of the country. When people are allowed to retain what they earn, they become more productive and at the same time increase the GDP of a country. The PIIGS countries are members of the European Union and, therefore, get to enjoy all their advantages. They enjoy free trade and monetary stability of a common currency. They are also able to access funding assistance to revamp their economies in case they experience an economic downfall. To date, the PIIGS countries are among the biggest economies of the world since they were funded after their downfall. However, their debt to GDP ratio is quite high as shown in the following graphs:
- Conclusion
Employment has a significant effect on the growth of the nation’s economy. When most of the nation’s population has employment, whether by the state, private organizations or even self-employed, this translates to an increase in the country’s GDP. When a large percentage of the nation’s population is unemployed, most of the citizens are on the lower class economy and subject to poverty. All in all, PIIGS countries and any other nation should steer clear of huge and persistent external debts as their repayment proves to have devastating effects on the economy of such nations. Countries should, therefore, practice common sense economics and adhere to practices that translate to effective sources of economic development.
Works Cited
Gwartney, James D. Common Sense Economics: What Everyone Should Know About Wealth and Prosperity. Rev. ed., 1st ed. New York: St. Martin's Press, 2010. Print.
Schmidt, Michael. "Introduction to the PIIGS." Investopedia. N.p., 25 Jan. 2012. Web. 13 June 2014. <http://www.investopedia.com/articles/economics/12/countries-in-piigs.asp>.
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