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Selective Employment Subsidies: Can Okun’s Law Be Repealed?

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Bishop, John H.
Haveman, Robert

Abstract

[Excerpt] Concern that structural factors impede efficient labor market performance is evidenced in both statistical analyses of economic potential and policy proposals for selective employment subsidies. Estimates of the level and expected growth of full-employment GNP have recently been revised downward, as has the 3.2 unemployment multiplier implicit in Okun's Law (see U.S. Council of Economic Advisers and George Perry). These indications of structural changes in labor markets reinforce statistics showing excessively high unemployment rates for youths and blacks, and labor force participation rates that are increasing for women and decreasing for men. The simultaneous concern with high inflation and high measured unemployment, in the context of major changes in labor force composition and increased variance in sectoral unemployment rates (see Perry), has brought forth numerous and sizable selective employment subsidy policies (SESP) in both the United States and Western Europe. The SESP, changes in potential GNP, and Okun's Law are not unrelated phenomena. This paper explores that relationship. Section I presents a brief taxonomy of the primary SESPs which are currently being discussed in Western industrialized countries. Section II provides the economic rationale underlying these measures. Section III explores the relationship of SESP to the prospective growth of aggregate output, in the context of Okun's Law. Evidence on the existence and magnitude of changes in employment decisions in response to the New Jobs Tax Credit (NJTC) is presented in Section IV.

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1979-03-01

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labor market; Gross National Product; employment; Okun’s Law; selective employment subsidy policies; SESP

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Required Publisher Statement: ©1979 American Economic Association. Reprinted with permission. Final version published as Bishop, J. & Haveman, R. (1979). Selective employment subsidies: Can Okun’s Law be repealed? American Economic Review Papers and Proceedings, 69(2), 124-130.

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