How jobs help the economy

I recently had a Twitter conversation with Heidi Moore, The Guardian's United States finance and economics editor, on inequality and growth. My key thesis was that inequality hampered development by preventing the economy from assigning opportunities to those most suited to take advantage of them; affluent dumb people would be given more opportunities than poor clever people. But just as I was about to make my argument, something occurred.

This interaction took me by surprise. You didn't have to search far in recent years to discover some extremely brilliant individuals discussing how much economic development is required to generate employment. Others have spoken of a "jobless recovery," in which growth occurs without a rise in employment. And yet, here was another highly brilliant guy claiming that they were all wrong - employment produced growth, not the other way around.

The truth is that it may work both ways, and the cycle can become self-perpetuating. Heidi believed that work supplied people with money, that income led to consumption, and that more consumption (as a component of GDP) signified growth. In theory, she is correct, but expansion may also produce employment.

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Assume that real interest rates unexpectedly decreased; credit became simpler to get, and saving became a less appealing proposition. Americans may elect to spend a greater portion of their riches. If Americans aren't only purchasing imports, the increased demand for products and services may encourage American businesses to recruit more workers.

But it wouldn't have to happen straight now. Initially, businesses may just urge their current employees to put in greater hours or effort. The economy might nevertheless develop without creating employment if more labor is put into the manufacturing process. If the increase in consumption continues, consumers may become bored of working overtime, forcing businesses to employ additional workers. However, economic development would have preceded the increase in employment.

This is but one example. Greater government expenditure, increased purchases of American products, or even private investment in a new sector may all result in increased demand for goods and services. Companies do not always employ immediately away, regardless of the reason. Growth often happens first, and then, after a period of time, organizations decide to recruit.

Economic growth has recovered before employment in previous recessions; the blue area has become positive before the red region. But, even if job creation does not resume, might decreased employment trigger a recession, as Heidi suggested? This does not seem to be the situation here. Jobs and real GDP both decline about the same time throughout each downturn.

There may be other times and places where this is not the case, but the evidence for the United States is quite obvious. Growth comes first, followed by more employment, and then, as greater salaries translate into more spending, more growth...and then more jobs...and then more growth...until the next recession.