1. 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

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

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

4. 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

6. Growth Rate of Real GDP per Head in Selected Countries
Sources: Angus Maddison (1982) and the Bureau of the Census ( )

7. Source : The Economist

8. Source : The Economist

9. 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.

10. 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

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

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

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

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

16. 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

17. 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