24 June 2013

Will TTIP Create Jobs?

Last Monday the prime minister gave enthusiastic backing to the proposed EU-US trade deal, known as TTIP. Among other things he proclaimed:
Two million new jobs
 According to theory trade has economic benefits, but job creation is not one of them. The reason why trade doesn't reduce unemployment is quite simple. The Bank of England and other central banks watch the unemployment rate. When it gets too low (below the "non accelerating inflation rate of unemployment") they tighten monetary policy and so push unemployment back up. So trade deals don't push unemployment below the NAIRU. Of course unemployment fluctuates with the business cycle, but trade impacts the long run, not short run fluctuations.

So where did Mr Cameron get his 2 million figure? I found this study which gives the same number. It claims a sophisticated methodology for its analysis of the employment benefits of  TTIP. Here is where they give themselves away:
the numbers presented below are to be considered long-term results or equivalent to changes in employment independent of the economic cycle. That means, for example, that a 1 percentage point drop in the unemployment rate reduces the unemployment rate during both an upswing and a downswing of the economy by 1 percent.
So if the central bank thinks that full employment (NAIRU) is 6% will TTIP mean that it will accept unemployment at 5 %? No, it will raise interest rates when unemployment falls to 6%.

In the long run all economies can reach full employment with or without TTIP.  Of course cyclical unemployment remains, which even this study accepts is not affected by trade deals.

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