Myth 3: Government spending and hiring alleviates unemployment.
Two economists from the University of Delaware, Burton Abrams and Siyan Wang, used data from 20 developed countries over three decades to examine how government spending as a share of GDP affects the unemployment rate (when accounting for other relevant factors). They found
That increases in government outlays hamper economic growth and raise the unemployment rate. Moreover, different types of government outlays are found to have different effects on growth and unemployment, with transfers and subsidies having a larger effect than government purchases. In addition, Granger causality tests suggest unidirectional causation from government outlays to economic growth and the unemployment rate.
These findings are notable because they don’t just establish a correlation; they use causality tests to find that government spending causes higher unemployment, not the other way around. Research by other economists arrives at similar results.
Moreover, scholars have examined the relationship between public employment and private employment. Using data from a sample of developed countries over the years 1960 to 2000, European researchers found, “On average, [the] creation of 100 public jobs may have eliminated about 150 private sector jobs, slightly decreased labour market participation, and increased by about 33 the number of unemployed workers.”
And recent study by the International Monetary Fund comes to the following conclusions:
High rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates … Public-sector hiring: (i) does not reduce unemployment, (ii) increases the fiscal burden, and (iii) inhibits long-term growth through reductions in private-sector employment.
All this evidence suggests that bigger government isn’t the solution to persistent unemployment. In fact, there is reason to believe that bigger government results in undesirable employment outcomes.
http://fee.org/the_freeman/detail/5-more-economic-myths-that-just-wont-diehttp://fee.org/the_freeman/detail/5-economic-myths-that-just-wont-dieMyth 1. The idea that economic growth helps the poor is trickle-down economics … it doesn’t actually help them.
In a 2001 paper titled “Growth Is Good for the Poor," economists Art Kraay and David Dollar of the World Bank found that when average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This result held across regions, periods, income levels, and growth rates. In 2013, more than a decade after their original paper, Kraay and Dollar explored the relationship between economic growth and poverty again, using data from 118 countries over four decades. They came to the same conclusion. According to the economists,
This evidence confirms the central importance of economic growth for poverty reduction … institutions and policies that promote economic growth in general will on average raise incomes of the poor equiproportionally, thereby promoting “shared prosperity” … there are almost no cases in which growth is significantly pro-poor or pro-rich.
This means that policies that enhance economic growth through methods such as limiting the size of government and lowering barriers to international trade are key to alleviating poverty. Economic growth, not transfer programs, is in fact the primary driver of poverty reduction, and this empirical truth has been proved for a long time.