EXTRAORDINARY ECONOMY POLICIES AMID COVID-19 PANDEMIC CRISIS: ECONOMIC GROWTH, LABOR PRODUCTIVITY AND ELASTICITY OF SUBSTITUTION

Year 2022, Volume: 9 Issue: 3, 95 - 103, 30.09.2022

Ata Ozkaya

https://doi.org/10.17261/Pressacademia.2022.1618

Abstract

Purpose- This study investigates current financial, fiscal and monetary policies implemented to enhance growth rate in developed economies.
First main theoretical findings of neoclassical growth theory are reconsidered. Second, current economy policies from the perspectives of
Central banks and Treasury departments are analyzed. Finally, the relationship between these two is investigated and whether the policies
are adequate to theoretical findings is examined.
Methodology- From the perspective of descriptive statistics, first; time evlotion of labor's share of output from 1947Q1 through 2016Q3 is
analyzed. Second, time evolution of percentage change in labor productivity with respect to real hourly compensation are considered from
1948Q1 through 2022Q1. In addition, to identify the accelerating gap between labor productivity and compensation over recent decades,
annual index levels from 1973 to 2022 for labor productivity with respect to real hourly compensation are taken into account. Third, the
phase-space representation of rate of real growth for output per capita is developed. In methodological perspective, both time-space and
phase-space analyses on output per capita, labor productivity and labor compensation clear the way to establish a theoretical model, which
explains the interaction between these variables based on constant elasticity of substitution production function.
Findings- For case of elasticity of substitution lower-than-unity, the relationship between rate of real growth for marginal productivity and
average productivity of labor is obtained and is used to enlighten current U.S. monetary and fiscal policy implementations.
Conclusion- The results demonstrate that amid Covid-19 pandemics, U.S. fiscal policy and monetary policy do not optimally match and hence
the fiscal policy should be calibrated. U.S. fiscal policy increased minimum wages and U.S. monetary policy addressed tighter and perfectly
competitive labor market. These two policies do not coincide in terms of efficiency. In other words, simultaneous application of these two
policies will not give desired compound result.

Keywords

Economic growth, labor productivity, fiscal policy, labor compensation, monetary policy

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