Academic journal article Journal of Economics & Management

Relationships between Unemployment and Economic Growth - the Review (Results) of the Theoretical and Empirical Research

Academic journal article Journal of Economics & Management

Relationships between Unemployment and Economic Growth - the Review (Results) of the Theoretical and Empirical Research

Article excerpt

Introduction

The relationships between economic growth and unemployment are currently a topical research theme. In view of the economic crisis, structural changes and high dynamics of technological advances, such research seems to be of significant importance and gains a new dimension. Moreover, the implementation of the EU economic programme, "Europe 2020", implies the new quality of these relationships. The member states have adopted three mutually reinforcing priorities: intelligent growth (the development of the economy based on knowledge and innovation), sustainable growth (the promotion of the economy which is more effective, ecological and competitive) and inclusive growth (the stimulation of high employment rates aimed at building social and territorial cohesion), the achievement of which requires higher resource efficiency (also labor resources).

Today, it is difficult to determine whether the European economy will achieve desired growth or if its character will lead to a decrease or an increase in unemployment. It is evident, however, that the insufficient use of labor resources is one of the most serious and important socio-economic problems which should be addressed as promptly as possible. Moreover, low dynamics of economic growth will result in an increased long-term unemployment rate (non-employment growth). On the other hand, high and persistent unemployment may be seen as a barrier to economic growth. Unemployment means lower global demand and lower investment in human capital. As a consequence of human capital erosion, the long- -term unemployed lose their qualifications partially or completely, while their skills become obsolete in the times of rapid technological advancements. Furthermore, fiscal costs (lower budgetary revenues and higher social spending) which arise contribute to lower public investment and increased public debt and, in the long run, they hinder growth opportunities.

Hence, economists are seeking an answer to the question whether unemployment is a variable dependent on economic growth dynamics or if mutual dependencies between them are of reciprocal nature. Alternatively, whether it is advisable to treat unemployment as a variable determining an economic growth rate. Literature review indicates that researchers have not reached agreement yet.

The paper aims to discuss the relationship between economic growth and unemployment as well as related determinant factors based on literature review. The accurate identification and interpretation of these relationships may provide effective tools for building intelligent growth and reducing high unemployment, which is, in particular, characteristic of the European labor markets. On the other hand, the results of research conducted in developed economies, cannot be applied to the countries undergoing economic transformation (EU-10) or characterized with significantly lower levels of socio-economic development. It is also important to define the areas which require further research and will contribute to the understanding of changes taking place in the modern economy.

1. Research approaches to growth - unemployment relationship

The subject of economic growth and the labor market is often treated as two separate research areas which deal with different issues and use different tools. Their theoretical integration has proved to be both illuminating and applicable to economic policies. Research into the relationship between economic growth and unemployment was started in the mid-20th century by Harrod and Domar. Their contribution, however, was an isolated example, because the Solow model introduced new ideas into the debate on economic growth, at the same time relegating the studies of the growth-unemployment relationship as less relevant (Solow 1956).

In the traditional models of economic growth, under economic equilibrium, factors stimulating economic growth dynamics do not have an impact on an unemployment rate (the assumption of the full use of the production factors). …

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