Pointed out by a user on steam, I think its worth pasting my reply here to canvas opinions of the hardcore players before I make a change
You raise a very interesting point, regarding the way in which something like unemployment should (due to the impact on lower consumer spending) should actually hurt GDP.
In the real world this is obviously true. High unemployment reduces consumer spending and reduces GDP. However, I am nervous about introducing this, because its a circular reference.
Don’t get me wrong, its accurate, and realistic, and the game’s code can totally handle it, but there is a problem in that it creates a ‘death spiral’ in game terms. GDP drops, so unemployment rises…so GDO drops…so unemployment rises… and in general the cardinal rule of game design is to never have virtuous circles or death spirals!
However…it may be safe to add this, because there are certainly antidotes to it. I guess the game has two main antidotes:
socialist version: expand the money supply by QE or helicopter money, meaning people have an artificially stimulated level of discretionary income…which should boost GDP and become self-reinforcing
capitalist version: Reaganomics/Thatcherism: Cut taxes, so people have more discretionary spending, so GDP rises…
These are already in the game…so it might be ok for me to sneak in a cup to GDP when unemployment is high, and collect some data to see if that totally unbalances the game or not…
Such a death spiral as you describe is exactly what happened after the 1929 stock market crash, and is why everything got bailed out so hard in 2008. This is a very real hazard in the real world which real world leaders make decisions based on.
Note added in edit: I will also point out that in the current build this would make technological advancement destroy every economy. This is because in the current build high levels of tech invariably create red unemployment. I get this even with a maxed out GDP, and all the employment programs like agricultural subsidy, vertical farming, space program, etc. all pumped up to the max and I still have red unemployment. The current model doesn’t represent the tightening of the labour market which happens when the economy is growing like crazy.
Cliff, I also want to ask: Is a “Labour shortage” crises even in the code? I’ve never had it happen. Whether it should be red or green really depends on perspective though, as it would be harmful to GDP, but great for things like wages and working week.
While I don’t agree to the consumption approach since the GDP is still about production imo and how much consumption-dependent the economy is will vary quite a lot by countries. Nonetheless, high unemployment would still mean inefficient use of production elements, meaning significantly lower GDP compared to potential value. (as mentioned here) Therefore, high unemployment can be a negative factor of GDP.
But if you are going to do that, I think this is a good chance to change how wages-to-low/middle income works. As I’ve mentioned in the income change proposal thread, unemployment currently has no impact on people’s income. Unemployment is that underrated in this game.
I’d also like to mention that Technology & Industrial Automation has so strong impacts on unemployment and players can’t wait for the market to solve the problem. I know what structural unemployment is but it’s something beyond what players can suppress with unexceptional measures. You might have already read that thread about unemployment and other simulations optimization. I had a feeling that maybe there are too many penalties to high technology and some might even try reducing it intentionally to avoid them. And it turned out that avoiding max tech was the key for full employment. Of course you can add more situations or links so that it’s harder to remain competitive without >90% technology as years pass, but your change will still mean that players are going to receive a permanent penalty of -X%p GDP for having high technology.
On your ‘antidotes’, I doubt they will actually be effective unless you add dedicated consumption simulation since
- QE/Heli Money are already quite popular policies with little downsides. Players won’t save them for future recessions.
- Lower GDP will mean less tax revenue in the first place. Do you think capitalistic governments will take a risk of going into even bigger deficit by cutting taxes?
- If we suppose that a GDP drop has been caused by high unemployment, these measures can’t just go away after the recession since unemployment would be the same unless a significant increase has been made in GDP, which is unlikely to happen for players having no problem at achieving max GDP.
In that sense, I suggest things below.
- Structural Unemployment from high Technology and/or Automation should be either A) weaker, B) decaying over time, or C) countered with some policies or situations.
- Unemployment arising from higher Productivity & maxed-out GDP needs to be dealt with.
- Unemployment Benefit should negate GDP penalty (since it increases unemployment but actually boosts income) if you are going to add a direct link between the Unemployment & GDP. I’d like to tell you that just use low & middle income simulations but
income_fixed links would be tricky points.
- If no significant changes are going to be made in simulations, consider adding more & stronger employment effects to policies. Telling players to deal with recessions from unemployment without any effective tools to fight unemployment would be rather absurd.
Related Posts of mine
Interesting Effects of Productivity & Maxed-out GDP
Lists of proposed changes to income simulations +misc
I think that you should go ahead and implement this, I always wanted to issue a $29 trillion bailout!
Lots of great feedback thanks!
Cliff, I also want to ask: Is a “Labour shortage” crises even in the code? I’ve never had it happen.
Yes! its called skills shortage, and definitely does trigger, but if you are playing well, it likely doesn’t trigger often.
GDP is still about production imo and how much consumption-dependent the economy is will vary quite a lot by countries.
Indeed, which is why I’m wary of this. Theoretically I could link this to international trade, but we only model trade as a neutral flow, and have no current simulation of whether consumer demand generates local or foreign production… i don’t want to overcomplicate the game!
unemployment currently has no impact on people’s income. Unemployment is that underrated in this game.
The way this should be working, is through the impact on wages. In some ways, this is a different effect (wages suppressed because people fear not being able to find a new job if they quit), but I have also taken it to represent the effect on people actually made unemployed. Maybe I need to revisit this and have it nudge down everyone’s income. I will read your thread.
- QE/Heli Money are already quite popular policies with little downsides. Players won’t save them for future recessions.
That sounds like a feature! because this is a real thing. Governments can be too ‘money-printing happy’, and then when they REALLY need to do it, they face a potential inflation nightmare because QE/HM is already too high.
Mostly agreed on your thoughts. I see that consumption-based stimulus is a real thing, at least in a short-term. But how consumption affects the economy will depend on dependencies to export or domestic demand. Countries doing a lot of trade to acquire the resources it needs won’t have to care that much about its people losing purchasing power, while those not will have more stable but consumption-dependent economy. It would be glad if these can become factors in the game but amount of works needed could easily exceed that of a new DLC I guess.
Regarding EQ/HM, I think the problem is that there’s no policy that is bad when used for too long in this game. There’s literally zero incentive to save them for future recessions because their GDP boosts don’t go away and inflation creeping at 8 turns of inertia has effectively no negative impact over time. It’s not like inflation is hurting disposable income or lowering effective wages. There’s no artificial boom that is likely to cause a bust in near future (or Malinvestment as Austrian School says). Turing on the QE right after a recession from high unemployment has no difference from keeping it enabled from the start.
It might be slightly off-topic but I really think unemployment in the game has to change. You always hear politicians scream about unemployment and brag about all the jobs they created and how good that is for the economy but in Democracy 4 there is no big economic advantage of trying to decrease unemployment. In fact the opposite is true because low unemployment massively decreases productivity which in turn decreases GDP.
By the way, why doesn’t unemployment influence payroll tax revenue while it does influence income tax revenue? Shouldn’t it influence both?
Why would unemployment drop GDP?
It wouldn’t necessarily drop productivity - productivity could just be driven by industrial automation, driverless cars, or the efficiency of the people who are employed.
It wouldn’t necessarily drop private consumption, as consumption can be increased by increasing the disposal income of the unemployed through socialist policies.
Even dropping local private consumption will not necessarily drop GDP, as that may be displaced by public consumption, or by international export consumption.
While it is true that unemployment doesn’t have significant impacts on the economy, unemployment does affect your approval. The poor & socialists will dislike you if you fail to solve unemployment.
There are at least 2 valid reasons for more unemployment = higher productivity.
- Employers will have more bargaining power under higher unemployment and thus will be able to force some pro-employer measures, likely leading to less idle time & higher efficiency.
- Under high unemployment, only the most efficient fraction of the workforce will be employed. Therefore, average productivity of the current employees will rise.
Employers will have more bargaining power under higher unemployment and thus will be able to force some pro-employer measures, likely leading to less idle time & higher efficiency.
This is already modeled:
Low unemployment increases wages (the cost of labor) which decreases productivity.
This is, as it should be, a productivity issue and not a direct GDP issue. There is no direct relation between unemployment and GDP.
Under high unemployment, only the most efficient fraction of the workforce will be employed. Therefore, average productivity of the current employees will rise.
This does not make sense. Under low unemployment, the most efficient fraction of the workforce will be employed, and operate at their normal productivity. Additionally, a less efficient fraction of the workforce will be employed, and operate at their lower, normal productivity. Average productivity per worker will be decreased, but total productivity will increase, if they are being employed in a productive sector.
I just played a short Democracy 4 run to experiment with unemployment and I noticed that high unemployment increases working week while low unemployment decreases working week. This doesn’t really make sense to me. I understand that with low unemployment employees have more power to bargain for shorter working weeks but on the other side if unemployment is low this means that there are not enough people to fill all open job vacancies which in turn would mean that working weeks should increase (or at least not decrease) to fill these open job vacancies with the laborforce available.
There are many ways for employers to force their workers to be more efficient without reducing their pay.
Also, low unemployment already directly impacts productivity in the game.
What’s the total productivity? Productivity here means products & services produced by workers per wages invested. It’s average by definition and can’t imagine any notion of total productivity.
Well, there’s the question. Is game productivity supposed to be A: “the efficiency with which wages are converted into production” or B: “the total amount of production which occurs in the economy”?
Because, full employment is going to reduce A no matter what, and it’s going to increase B if everyone is being employed in productive sectors. In the game, this cannot be achieved, and full employment can only be achieved by employing people in non-productive public sectors.
I understand that with low unemployment employees have more power to bargain for shorter working weeks
but on the other side if unemployment is low this means that there are not enough people to fill all open job vacancies which in turn would mean that working weeks should increase (or at least not decrease) to fill these open job vacancies with the laborforce available.
In a seller’s market for labor, employers get the short end, and so they cannot increase working weeks without their labor, which is in high demand, being attracted by better offers in other sectors. They just have to eat the losses, which is modeled in the game by the direct and wage-modulated effects of low employment on productivity.
I have been mentioning the same thing. I thought you didn’t recognize or forget it.
Wouldn’t the definition B mean just GDP instead of Productivity? I see Productivity as GDP divided by Total Labor Cost.
Wouldn’t the definition B mean just GDP instead of Productivity?
In this context, yes.
The game does not distinguish between real GDP, and paper GDP like from “Tax Shelters” and other private taxation bureaus that are unrelated to production. But, that is not the topic, here.
So, yes. Unemployment should not drop GDP. It has no direct effect on GDP. If a direct effect on GDP is missing here, it would be a “Disposable Income → Private Consumption → GDP” chain of effects, and for this chain, there are other ways to increase (and decrease) disposable income, and domestic private consumption can be displaced with public and international consumption.
Agreed that it is not an absolute direct effect, but an indirect one (through private consumption), but I think that it still needs to be modeled (and I am wary of the justification of introducing such an extra level of interim modeling due to the complexity for the player).
When you say the drop in private consumption will be offset by a boost of public consumption, I’m not sure thats true, other than by the state spending money on unemployment benefit, but in almost all countries unemployment benefit is below the average wage, so the net availability of funds for generating consumer demand must have dropped?
Put another way: If people lose their jobs, they buy fewer flatscreen TVs. Thats a drop in GDP because of the reduced production of flatscreen TVs that will result.
I have always thought of this as being A, although I admit that this is not immediately obvious and clear
If Joe lost his job to automation, automation → production → GDP → Taxes, now the State has more money. It can give this money back to Joe to buy his TV, or it can spend this money elsewhere, like on an Electric Cars Initiative. In the latter case, Joe doesn’t get a TV, but someone else gets a share in an electric car. This is public spending.
So, something is still produced either way, but with this arrangement, his money is being spent on more automated machines, to displace more jobs.
It’s a beautiful cycle.
Consumption remains the same, but now it is public consumption.
The “How I Solved This Game” thread has recently been updated with an example of a game economy driven mostly by public consumption.
Alternatively, Joe keeps his job, but his disposable income is low because of high taxation, which is just going into the surplus instead of being circulated, and the lack of public services. Joe still can’t afford the TV. No TVs, or electric cars, will be produced.
Alternatively, Joe loses his job and ends up on unemployment, his disposable income goes down, he buys one less TV, his boss who replaced him with automation has his business become more profitable, boss disposable income goes up, he buys one more TV.
It has to be A. B is “Real GDP”, and game GDP is “Real GDP” plus “Capital Flow Imbalance” from things like tax shelters, which add liquid capital into the economy but do not correlate to real goods and services.
At any rate, real GDP is gross domestic product, not gross domestic consumption. You can have everyone be poor, send massive amounts of domestic product overseas in the form of international trade, and the head of State can spend the difference on his swimming pool full of money. Not only is not all consumption private, but not all consumption is domestic. See: China in the 21st century.