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Does it Make Sense to Increase Labour Supply to Stimulate Economic Growth?

 

Introduction

The Australian Government recently released the 2015 Intergenerational Report in an effort to educate the Australian public on the challenges facing the government and society by 2055. According to Treasury’s modelling, net debt would increase from 15.2% of GDP to 60% by 2055. Per capita income growth would increase from 1.7% per year to 1.5%. What does the Australian Government propose to do about it? Their answer is to increase participation and productivity – i.e. increase the quantity and quality of inputs used in economic growth. The government seems to mean increasing labour supply and improving labour productivity. But does this policy prescription actually make sense?

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Too Big to Grow

 

Summary

The Bank of International Settlements (BIS) recently released a new report analysing the relationship between the growth of the financial sector and productivity growth. The empirical findings are particularly worrying. The BIS economists estimate that in countries experiencing rapid growth in their financial sector, financially-dependent industries experience 2.5% lower productivity growth than in countries with slower growing financial sector. To put that into perspective, the OECD average of productivity growth was 1.6% during 2009-12. Clearly, this is a disturbing finding for any economic policy-maker. What do the BIS findings tell us are the appropriate macroeconomic policy settings for productivity growth? What does this mean governments can actually do? And what does it mean in terms of winners and losers in an economy?

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