Economic Growth and Rising Living Standards

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Economic Growth and Rising Living Standards

• Outline
• The importance of growth
• What makes economies grow?
• Growth of employment
• Growth of the stock of physical and human capital
• Technological change
• The costs of growth

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If real GDP grows faster than the population,
then the average standard of living will increase
Real GDP
GDP per Head
Ave. StandardOf Living
Population
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The Malthusian view1 Population grows
geometrically and the food supply grows
arithmetically
Population
Population
Food Supply
Food supply
Time
1Thomas Malthus. Essays on the Principle of
Population, 1798
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The Malthusian view is not confirmed by the U.S.
record. Real GDP per head has increased by nearly
three-fold since 1952
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Growth Rate of Real GDP per Head in Selected
Countries
Sources Angus Maddison (1982) and the Bureau of
the Census (www.census.gov/ipc/www.idbsum.html )
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Source The Economist
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Source The Economist
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How to raise GDP per Head?
If you want to improve the standard of living,
you either have to work longer and harder or you
have to work smarter.
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Growth of Employment

1. Lengthening of the work week
2. Increased labor force participation
3. Population growth

EconomicGrowth

1. Growth of the stock of physical capital
2. Growth of the stockof human capital.
3. Technological change

Growth of Productivity
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Real Hourly Wage
Shift of Labor Supply (LS)
LS1
LS2
15
12
LD
0
100
120
Millions of Workers
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RealGDP
Increased employment raises Real GDP
8 Trillion
7 Trillion
0
100
120
Millions of Workers
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An Increase in Labor Demand (LD)
Real Hourly Wage
LS
B
17
15
A
LD2
LD1
0
120
100
Millions of Workers
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The U.S. Labor Market Over a Century
Real Hourly Wage
LS1
LS2
B
W2
W1
A
LD2
LD1
0
L1
L2
Millions of Workers
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How to increase total employment

• Use tax policy to create incentives to work and
  disincentives to leisure.
• Reductions in tax rates increase the after-tax
  real wage

Hourly Real Wage Tax Rate After-Tax Real Wage
30.00 33.3 20
30.00 20 24
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Personal Responsibility and Work Opportunity
Reconciliation Act of 1996

• Popularly known as the Welfare Reform bill
• Replaced AFDC with time-limited cash assistance
  (Temporary Aid to Needy Families or TANF).
• Adults in families receiving TANF required to
  participate in work activities1 after 24
  monthssubject to good cause exemptions.
• Sharp decrease in welfare case loads since 1996.
• Increase in labor force participation rates among
  former AFDC recipients.

1Work activities defined to include pursuit of
the GED, vocational training, or provision of day
care services to an individual participating in a
community service program