In July, the US unemployment rate fell 0.1% from the month before to 3.9%. The number of unemployed individuals fell by 284,000 to 6.280 million. Many commentators have expressed satisfaction with the decline in the unemployment rate. For them, this implies a strong economy.

For most economists, the key to economic growth is a strengthening in the labor market. The strength of the labor market is the key behind the strength of the economy – so it is held.

If this is the case then it is valid to conclude that changes in unemployment are an important causative factor of real economic growth.

This way of thinking is based on the view that a reduction in the number of unemployed means that more people can now afford to boost their expenditure. As a result, economic growth follows suit, it is held.

The expanding pool of real wealth not unemployment the key to economic growth

We suggest that the main driver of economic growth is an expanding pool of real wealth. Fixing unemployment without addressing the issue of wealth is not going to lift economic growth as such.

It is the pool of real wealth that funds the enhancement and the expansion of the infrastructure. An enhanced and expanded infrastructure permits an expansion in the production of the final goods and services required to maintain and promote individuals’ lives and wellbeing.

If unemployment were the key driving force of economic growth then it would have made a lot of sense to eradicate unemployment as soon as possible by generating all sorts of employment.

For instance, policymakers could have followed the advice of Keynes and his followers such as Paul Krugman and employ people in digging ditches, or various other government-sponsored activities. Note that the aim here is just to employ as many people as possible.

A simple commonsense analysis however quickly establishes that such a policy would amount to depletion in the pool of real wealth. Remember that every activity whether productive or non-productive must be funded.