To view the Abrams Curve and its inventor, go to:
The Abrams Curve--discovered by University of Delaware economist Burton A. Abrams and disclosed Oct. 15--provides direct evidence of a relationship between the size of a country's government and its unemployment rate, according to a forthcoming article in the journal, Public Choice.
"If we look at the world's seven largest and richest countries, the so-called Group of Seven, we find a nearly perfect rank-order correlation between government size and jobless rates," says Abrams, a UD professor of economics. "A statistically significant link, although somewhat weaker, also emerges when we expand the sample of countries to include all large developed economies."
This suggests that "at least some of the increases in jobless rates in the United States since 1949 have resulted from increases in government outlays," according to Abrams. Reducing the size of the U.S. government would, therefore, probably reduce the unemployment rate, he says.
How does big government drive unemployment? Larger governments tend to impose higher tax rates, Abrams says, and they are more likely to provide public health and unemployment insurance, "thereby lowering the cost of leisure to the individual." Big governments also may subject employers to a greater number of regulations, which can affect hiring decisions and reduce job opportunities. Finally, Abrams says, big governments hire more people, reducing the size of the private job market. A smaller private job pool may be less diversified, and consequently, less resilient to the decline or loss of a particular sector.
Abrams emphasizes, however, that "big governments need not raise the unemployment rate." Large outlays for job training and placement, for instance, can help reduce joblessness. Economists are well aware, however, that many government programs can cause unemployment, Abrams notes. Unemployment insurance, for example, "often protects individuals from feeling any sense of urgency to find work," he says. In fact, he says, researchers have previously found that U.S. unemployment insurance has raised the country's jobless rate by approximately 1 percentage point.
"Although economists are aware that some programs can cause unemployment," he says, "they may be surprised that overall government size is a predictor of the unemployment rate."
Using data published by the Organization for Economic Cooperation and Development (OECD), Abrams plotted the average unemployment rate and government spending levels as a percentage of gross domestic product (GDP) in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States for the period from 1984 through 1993. Representing 70 percent of the total OECD population, this Group of Seven includes all countries with a population greater than 25 million and average household incomes of more than $17,000 in 1994. Within this group, the Abrams Curve shows a 0.96 rank-order correlation--or an almost one-to-one relationship--between government size and jobless rates. For these countries, Abrams says, a 1 percent increase in government spending as a percentage of GDP is associated with a rise in the unemployment rate of approximately 0.36 percent--from, say, 8 percent to 8.36 percent.
SWEDEN BUCKS THE TREND
Abrams then expanded his analysis to include all members of the OECD for which he could obtain data. To the Group of Seven, he added Australia, Austria, Belgium, Denmark, Finland, Greece, Ireland, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland. The result? He says he was disappointed to find that the Abrams Curve "no longer appeared statistically significant for this larger sample of countries."
When Abrams removed Sweden from the mix, however, his statistical curve reemerged from the data. Apparently, he says, "Sweden is the exception that proves the rule." Sweden bucks the trend, he says, because "the government spent enormous amounts on public benefits during the study period, but these benefits were tied to employment," a stipulation that obviously motivated people to find jobs more quickly. "My model predicts that Sweden's jobless rate would be 7 to 12 percent higher if the government had made these benefits available to individuals without jobs," he says.
Economists have previously shown that larger governments can inhibit economic growth, perhaps by reducing productivity. But the Abrams Curve may provide the first evidence of a link between the size of government and its jobless rate. "The paper does make a political statement about big government," he notes, "and it's bound to prove controversial."
Abrams' paper was accepted for publication by peer reviewers for the journal, Public Choice (Kluwer Academic Publishers) in September 1997.