NCPA - National Center for Policy Analysis

Slow And Steady Wins The Race

July 12, 2000

Developed nations do better economically when their economies exhibit small, but steady growth according to some economists. An analysis of several developed, European nations concludes that there is a significant negative relation between long-term growth and a "boom and bust" business cycle in which rapid growth and high employment is followed by an economic contraction with job losses.

The study found:

  • A reduction in economic fluctuations in developed countries by one standard deviation (a measure of variability) increased growth rates by roughly 0.4 to 0.5 percent per year.
  • A reduction in the instability of the unemployment rate by one standard deviation increases the growth rate by 0.8 to 0.9 percent.

The study attributes the economic bonus from stability to the labor force. On-the-job learning rises with production, but workers lose skills during unemployment, thus becoming less productive than if they were still employed. This only applies to developed nations however. This is not true in developing nations, where jobs require fewer skills.

Source: "Stability is Good For Growth," Economic Intuition, Spring 2000. Based on: Philippe Martin and Carol Ann Rogers, "Long-term growth and short-term economic instability," European Economic Review, February 2000.

 

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