Labor Market Adjustment

Friday, December 7, 2018
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istock

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Today, there is suggestive evidence that policies during the recession failed to promote labor market adjustment, leading to permanently lower worker hours.

This matters because in the long-run, the growth rate of potential GDP equals the growth rate of employment – that is, worker hours – plus the growth rate of productivity – that is, output per worker-hour – plus some other lesser factors. Thus a slower long-run growth rate of worker hours translates one-for-one into a slower growth rate of potential GDP.

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