1. Outline 1.The importance of growth 2.What makes economies grow? 3.Growth of employment 4.Growth of the stock of physical and human capital 5.Technological change 6.The costs of growth

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

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

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

8. 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 )www.census.gov/ipc/www.idbsum.html

9. Source : The Economist

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

12. Economic Growth Growth of Employment 1.Lengthening of the work week 2.Increased labor force participation 3.Population growth Growth of Productivity 1.Growth of the stock of physical capital 2.Growth of the stock of human capital. 3.Technological change

13. Real Hourly Wage Millions of Workers 0 LDLD LS1LS1 LS2LS2 Shift of Labor Supply (L S ) $15 12 100120

14. Real GDP Millions of Workers 0 100120 $7 Trillion $8 Trillion Increased employment raises Real GDP

15. Real Hourly Wage Millions of Workers 0 LD1LD1 LD2LD2 LSLS A B 120100 15 $17 An Increase in Labor Demand (L D )

16. Real Hourly Wage Millions of Workers 0 The U.S. Labor Market Over a Century A B LD1LD1 LD2LD2 LS1LS1 LS2LS2 W1W1 W2W2 L1L1 L2L2

18. 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 $30.0033.3$20 30.002024

19. 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. 1 Work 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