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"Selective Use of Discretionary Public Employment and Economic Flexibility"



Working Paper No. 218 Selective Use of Discretionary Public Employment and Economic Flexibility by Mathew Forstater” Working Paper No. 218 December 1997 *Visiting Scholar, The Jerome Levy Economics Institute and Assistant Professor of Economics, Gettysburg College Flexibility is a desirable feature of an economic system. Structural rigidities can result in sluggish growth and inflationary pressures. Many economic models, however, display considerable system flexibility because of the use of unacceptably unrealistic assumptions. The primary ‘real-life’ features endowing the system with flexibility are unemployment and excess capacity. While realistic, unemployment is economically costly and socially undesirable. In economic theory, there appears to be a trade-off between flexibility and realism. In reality, there appears to be a trade-off between flexibility and full employment. What has not been adequately recognized, however, is the degree to which policies are available that can promote higher levels of employment--and even full employment--without resulting in deleterious rigidity. The Importance of Flexibility The term ‘flexibility’ has become something of a buzzword. It is often used in different ways and its meaning can be unclear. ’ Flexibility here refers primarily to the elasticity of the production system, the adaptability of the production system in the face of structural and technological changes, such as capital- or labor-saving technical innovations, changes in labor supply or the supply of natural resources, and changes in the composition of final demand. A viscous system will have trouble adapting quickly to such changes and thus may be characterized by bottlenecks in production, sluggish growth, inflationary pressures, significant structural, frictional, and technological unemployment, and stretches of underutilization of plant and equipment. Conversely, the more elastic the production system,

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