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

Year 2022, , 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

References

• Aghion, P., Jones, B.F.& Jones, C.I. (2019) Artificial Intelligence and Economic Growth, in The Economics of Artificial Intelligence: An Agenda. Edited by Ajay Agrawal, Joshua Gans, and Avi Goldfarb. https://www.nber.org/system/files/chapters/c14015/c14015.pdf
• Arrow, K.J., Chenery, H.B., Minhas, B.S. & Solow, R.M. (1961). Capital-labor substitution and economic efficiency. Review of Economics and Statistics, 43(3), 225–250.
• Barelli, P.,& Abreu Pessôa, S.(2003).Inada conditions imply that production function must be asymptotically Cobb–Douglas. Economics Letters, 81, 3,361-363, https://doi.org/10.1016/S0165-1765(03)00218-0.
• Cantore, C., Ferroni, F. & Le ́on-Ledesma, M.A. (2017) The dynamics of hours worked and technology. Journal of Economic Dynamics and Control, 82, 67–82
• Chirinko, R.S. (2008).σ: The long and short of it. Journal of Macroeconomics, 30(2), 671–686.
• Chirinko, R.S. & Mallick, D. (2017) The substitution elasticity, factor shares, and the low-frequency panel model. American Economic Journal: Macroeconomics, 9(4), 225–253.
• Eckmann, J.-P., Kamphorst, S.O., & Ruelle, D.(1987). Recurrence plots of dynamical systems. Europhysics Letters, 4 (9), 973-984.
• Elsby, M.W.L., Hobijn,B. & Şahin,A. (2013).The decline of the U.S. labor share. Brookings Papers on Economic Activity, 1–63.
• Giandrea,M.D., & Sprague,S.(2017). Estimating the U.S. labor share. Monthly Labor Review, U.S. Bureau of Labor Statistics, https://doi.org/10.21916/mlr.2017.7
• Herrendorf, B., Herrington, C. & Valentinyi, A. (2015) Sectoral technology and structural transformation. American Economic Journal: Macroeconomics,7(4), 104–133.
• Karabarbounis,L., & Neiman,B. (2014).The global decline of the labor share. Quarterly Journal of Economics, 129(1), 61–103.
• Knoblach, M., Roessler, M. & Zwerschke, P. (2020). The elasticity of substitution between capital and labourin the US economy: A metaregression analysis. Oxford Bulletin of Economics and Statistics, 82(1), 62–82.
• Lawrence,R.Z.(2015). Recent declines in labor’s share in U.S. income: a preliminary neoclassical account. NBER Working Paper, 21296 (Cambridge, MA: National Bureau of Economic Research), http://www.nber.org/papers/w21296.pdf
• Litina, A., & Palivos T. (2008). Do Inada conditions imply that production function must be asymptotically Cobb–Douglas? A comment. Economics Letters, 99,498-499.
• Marwan,N., Romano,M.C., Thiel,M.,& Kurths, J. (2007). Recurrence plots for the analysis of complex systems. Physics Reports, 438 (5), 237- 329.
• Oberfield, E. & Raval, D. (2014). Micro data and macro technology. NBER Working Paper No. 20452.
• Ozkaya, A. (2021). Inada conditions asymptotically transform production function into the Cobb–Douglas. Economics Letters, 109786.
• Peretto, P.F. & Seater, J.J. (2013). Factor-eliminating technical change. Journal of Monetary Economics, 60 (4), 459-473.
• Ravikumar,B., & Shao,L. (2016).Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend. Economic Synopses, 16, https://doi.org/10.20955/es.2016.16
• Sprague,S. (2021).The U.S. productivity slowdown: an economy-wide and industry-level analysis. Monthly Labor Review, U.S. Bureau of Labor Statistics, https://doi.org/10.21916/mlr.2021.4.
• Temple,J.(2012).The calibration of CES production functions. Journal of Macroeconomics, 34(2), 294-303, https://doi.org/10.1016/j.jmacro.2011.12.006.
• World Health Organization, 2020/03/11, https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200311-sitrep-51- covid-19.pdf?sfvrsn=1ba62e57_10