Economics colloquium looks at trends in GDP, unemployment

On Friday, Oct. 4, Professor of economics and John R. Kimberly Distinguished Professor in the American Economic System Marty Finkler had the stage for the first economics colloquium of the year.

The presentation was held in the first floor of Steitz Hall and was open to members of the Lawrence and Appleton community. However, the colloquium—provided primarily for students and faculty in the economics department—discussed issues at a relatively advanced level, unlike other symposiums frequently offered on campus. Around fifty people, including several professors and Appleton locals, attended the lecture that was held.

The lecture was a review of an academic paper Finkler wrote discussing the relationship between macroeconomic policy and unemployment. Specifically, Finkler looked at the trends in GDP and unemployment. “The trends in GDP and the trends in unemployment are not the same,” said Finkler, as he began his presentation. “Policies that are designed to increase GDP may not work all that well to decrease unemployment.”

This tackles the first of several intuitive but misled notions that those without an extensive background in economics may not understand. GDP is the market value of all goods and services produced in a country, thus it would make sense that positive trends in GDP are an indicator of a healthy economy. As Finkler pointed out in an interview after the presentation, this is not true because of the disparities between GDP and unemployment. Following the 2008 recession, GDP and unemployment fell. When the GDP grew, the unemployment levels continued to remain high. This, as Finkler suggests, means that policies designed to increase GDP may not improve employment.

In his presentation, Finkler argued that rather than tackle unemployment on a macroeconomic scale, policies should be focused on reorganizing the labor force rather than simply improving economic growth. “Monetary policy has nothing to do with either of those issues other than making capital cheaper,” Finkler explained in a follow-up interview earlier this week. Because current economic policies are making capital cheaper, employment suffers—a key point Finkler made in his presentation.

Finkler explained how the  central bank has attempted to intervene on this issue by controlling the federal funds rate—the rates of overnight lending between banks. “The regulation of the federal funds rate has been the primary instrument of monetary policy since the nineteen thirties,” Finkler pointed out.  However, as the interest rate approached zero, it became evident that lowering the Federal Funds Rate was ineffective.

There are, as Finkler points out, many steps between putting more money into the economy and improving unemployment—particularly what the banks decide to do with the influx of money—thus why there hasn’t been an improvement in employment despite growth in GDP. This is where Finkler’s argument comes into play. “You can’t ignore the microeconomic foundations that are driving people’s decision-making,” he says. By tackling the short term microeconomic issues of how businesses hire labor, the issue of unemployment can be tackled directly.

“The short-run solution is to make it more attractive to hire labor than to make capital cheaper,” says Finkler. “The long-run solution is obviously to create a more skilled labor set with incentives to participate in the work force and improve one’s skills to do what’s in demand”.

Although the issue of how to make labor more attractive was not discussed directly, Finkler did lay out a broader issue that needs to be tackled first: The belief that employment would rise with GDP did not turn out to be true. Thus, employment cannot be expected to improve along with policies that improve GDP.

For anybody interested in an economics major, or anyone who is passionate about economics nonetheless, be sure to look out for future economics colloquiums.