Fiscal Policy and Employment

Fiscal Policy and Employment

As the report mentioned, there is a jump in US economy in the third quarter, while at the same time, more than 20 million Americans are unemployed. Standing on the view of the fiscal policy, we can try to study its relationship with employment.

First of all, Mr. Romney stated that "Slow economic growth means slow job growth and declining take-home pay", which shows there is a negative correlation between the unemployment and the actual GDP, that is, when the actual GDP increases, the unemployment rate decreases, and when the actual GDP is reduced, the unemployment rate rises. In macroeconomics, the negative correlation between unemployment and the actual GDP is called the "Okun theorem".

Secondly, according to the economic data, last month, the US unemployment rate fell to 7.8%, down from 8.1%, which is the lowest since January 2009 when Mr. Obama's term in office began. In addition, a large increase in government spending is a vital contribution to the economy jump. This phenomenon is based on Keynes's theory of "effective demand shortage". Due to the shortage of demand, the total supply is greater than the total demand, and the actual output does not meet the full employment level of output, so there is a tight gap. In order to solve the problem, the government take expansionary fiscal policy. As we can see in the report, Federal government expenditures and gross investment increased 9.6% compared with the previous quarter, while national defense spending rose by 13%. The government take initiative to increase the deficit, increase investment in public infrastructure, increase national defense, aiming to expand spending, so as to stimulate aggregate demand. As a result, unemployment rate fell.

In a word, by implementing the fiscal revenue policy and fiscal expenditure policy, the government try to change total social demand as well as supply and economic structure, which will cause the change in aggregate employment.

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