Austerity: The Jobs Killer

Yesterday I posted research by Martin Wolf demonstrating decreases in economic growth in Eurozone countries is associated with their austerity programs. The higher the level of fiscal tightening during the economic downturn the lower the percentage change in GDP, 2008-2012.

While Wolf’s research is very valuable for policy-making most Americans don’t walk around  worrying about GDP changes. They are concerned about jobs.  They hear all kinds of rhetoric about “jobs-killing programs” with little or no evidence provided justifying the  claim.

Wolf’s research motivated me to assess the relationship between austerity programs in the Eurozone with percentage changes in unemployment in those countries. Wolf kindly shared his data and it was easy to download the unemployment figures from the International Monetary Fund.

With data in hand I regressed percentage change in unemployment on austerity, assuming change in unemployment is the result of policy, rather then cyclical effects. The model is statistically significant (Prob > F =  0.008). Here’s a graph depicting the relationship between percentage change in unemployment and austerity.

The linear fit demonstrates a direct relationship between austerity and percentage change in unemployment. That is, the higher the level of austerity the higher the percentage change in unemployment. While the model is statistically significant it should be noted the model accounts for only 24 percent of the variance in unemployment changes.

Nonetheless, if you are looking for “job-killing programs” look to austerity programs during an economic downturn.

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