Thursday, October 29, 2009

GDP on the Rise: Great but...

...don't look for unemployment to come down much. Don't misunderstand, 3.5% GDP growth is fantastic news, and you gotta start somewhere, but if you are more interested in unemployment (which is what most households care about rather than GDP), 3.5% doesn't move the unemployment rate much.

Paul Krugman has the sobering details:

Here’s the scatterplot of annual growth versus annual changes in the unemployment rate over the past 60 years:


Note, the graph did not display well with my black background, so here is essentially the same information (in this case 8 quarters rather than 4) from a graph made by Brad DeLong:

The average, according to Krugman, is about a half a percentage point, but notice on the graph that there are data points both in the positive and negative range for change in unemployment. How can that be? Well, productivity can go up (it is), the underemployed can work more (but this is not reflected in the base unemployment number) and discouraged workers can re-enter the work-force which counters job creation in the unemployment stats.

Savvy readers will recognize this picture as as graph of Okun's law. A fairly standard rule of thumb is about a .5% decrease in unemployment for every 1% increase in GDP so at the higher end we might expect a bigger impact on unemployment but as there is so much slack in employment (lots of underemployed and discouraged workers) we might not see much movement at all at least for a while.

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