Economic Growth and Rising Living Standards Outline The importance of growth What makes economies grow? Growth of employment Growth of the stock of physical and human capital Technological change The costs of growth

If real GDP grows faster than the population, then the average standard of living will increase GDP per Head Ave. Standard Of Living Population

The Malthusian view1: Population grows geometrically and the food supply grows arithmetically Time 1Thomas Malthus. Essays on the Principle of Population, 1798

The Malthusian view is not confirmed by the U. S. record The Malthusian view is not confirmed by the U.S. record. Real GDP per head has increased by nearly three-fold since 1952

Growth Rate of Real GDP per Head in Selected Countries Sources: Angus Maddison (1982) and the Bureau of the Census (www.census.gov/ipc/www.idbsum.html )

Source : The Economist

Source : The Economist

How to raise GDP per Head? If you want to improve the standard of living, you either have to work longer and harder or you have to work smarter.

Growth of Productivity Growth of Employment Lengthening of the work week Increased labor force participation Population growth Economic Growth Growth of the stock of physical capital Growth of the stock of human capital. Technological change Growth of Productivity

Real Hourly Wage Shift of Labor Supply (LS) LS1 LS2 $15 12 LD 100 120 Millions of Workers

Increased employment raises Real GDP $8 Trillion $7 Trillion 100 120 Millions of Workers

An Increase in Labor Demand (LD) Real Hourly Wage LS B $17 15 A LD2 LD1 100 120 Millions of Workers

The U.S. Labor Market Over a Century Real Hourly Wage LS1 LS2 W2 B W1 A LD2 LD1 L1 L2 Millions of Workers

How to increase total employment Use tax policy to create incentives to work and disincentives to leisure. Reductions in tax rates increase the after-tax real wage Hourly Real Wage Tax Rate After-Tax Real Wage $30.00 33.3 $20 30.00 20 24

Popularly known as the “Welfare Reform” bill Personal Responsibility and Work Opportunity Reconciliation Act of 1996 Popularly known as the “Welfare Reform” bill Replaced AFDC with time-limited cash assistance (Temporary Aid to Needy Families or TANF). Adults in families receiving TANF required to participate in “work activities”1 after 24 months—subject to “good cause exemptions. Sharp decrease in welfare case loads since 1996. Increase in labor force participation rates among former AFDC recipients. 1Work activities defined to include pursuit of the GED, vocational training, or provision of day care services to an individual participating in a community service program