April 28, 2016

Note on the employment multiplier

Refers to Chris Dillow On Multipliers


The multiplier discussion lacks sound theoretical foundations. The most elementary version of the correct employment equation for the economy as whole is given here.

The multiplier is composed of the ratios rhoE and rhoF:*
— An increase of the expenditure ratio rhoE=C/Y leads to higher employment.
— An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. The equation contains only measurable variables and is testable. This should end the groping in the dark and the inconclusive wish-wash.

Egmont Kakarot-Handtke

* For details see ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment