Economic Performance and Unemployment
This chapter introduces several topics relating to macroeconomic performance. While this may seem to have little connection with unemployment protection, it provides important background information for understanding the context of unemployment protection and the specific issues prevalent in various regions of the world. Readers more interested in a comparative analysis of unemployment protection arrangements could start with Chapter 3. Specific issues addressed in detail here are also revisited in later chapters.
The objective of this chapter is to establish the link between macroeconomic performance in the product market and the labor market and to argue for the necessary role of unemployment protection. In terms of macroeconomic variables, performance is translated into three standard goals: high growth in real output, low inflation, and low unemployment. Countries with strong macroeconomic performance are characterized by high rates of real output growth, low inflation, and low unemployment. In the long run, growth in employment is influenced by growth in real output. This linkage shows that strong (or weak) performance in the product market is transmitted to the labor market. Hence, when output growth slows, it adversely affects employment growth. 1 This chapter explores this relationship using time series data from several large economies.
As noted above, when a country's economic performance is strong, the output of goods and services rises, causing increases in employment and hours worked. Yet, high unemployment rates can persist even when aggregate real output grows at a reasonably rapid rate. This phenomena has been especially noticeable in several advanced western economies during the 1980s and 1990s. Some of this unemployment persistence has been linked with the generous provision of benefits to the unemployed as well as strong statutory measures to provide contractual employment security. While different facets of this issue are examined in subsequent chapters, this chapter examines the unemployment experience of the large economies using time series data.