Growth Is Key to Job Creation, IMF Conference Finds

IMF conference discusses how best to create jobs in aftermath of recession

Raising aggregate demand, strengthening financial intermediation remain critical

Taxes can be effective way to mitigate income inequality without stifling growth

Participants in the Thirteenth Jacques Polak Annual Research Conference hosted by the IMF at its Washington DC headquarters on November 8 and 9 discussed recent research on critical labor market problems. The aim was to figure out the best way to create jobs and reduce inequality.

Matching skills

Nobel prize winner George Akerlof argued in his opening remarks (which you can watch) that most unemployment is caused by changes in demand, rather than by so-called structural issues pertaining to employees’ qualifications, location, and/or age. This means that “aggregate demand shocks”—changes to the economy that affect all such groups at the same time—are the key to remedying unemployment.

While structural government policies that facilitate job matching, for example, or help people move to where the jobs can help, they are less important than those that support overall demand, according to Akerlof.

“The road to bliss is not through austerity,’’ concluded Akerlof.

This contrasts with an increasingly popular view in policy circles that the recent crisis has severed links between output and employment recovery, implying that even healthy output growth will fail to reduce unemployment to precrisis levels.

In the conference’s keynote Mundell-Fleming lecture (which you can watch), Peter Diamond, MIT professor and also a Nobel laureate, noted that skills matching and other structural frictions reduce the scope for monetary and fiscal policy in job recovery, but there is evidence that unemployment has a sizable cyclical component that can be sometimes misconstrued as being “structural.” If so, fiscal and monetary policies geared toward fostering consumption and investment both at home and abroad are all the more important as countercyclical tools in employment recovery.

Stronger product markets

This message was aligned with recent empirical evidence on the link between dwindling product markets and rising unemployment. Professor Laurence Ball of Johns Hopkins University, with IMF researchers Daniel Leigh and Prakash Loungani, showed that the so-called Okun’s law—which postulates that a 1 percentage point deviation in output from trend leads to a ½ percentage point deviation in unemployment from its...