Economist Paul Krugman, "Growth and Unemployment"

"Growth and Unemployment"

by Paul Krugman

"A few commenters have asked how it’s possible to have a recovery with rising unemployment; also there seems to be some confusion about what I meant by saying that the unemployment rate isn’t much out of line. So I thought I’d offer a chart — and I learned something in the process.

So here’s what economists mean when they talk about “Okun’s law” (which, like almost everything in economics, is a rough rule of thumb rather than a true law.) On the horizontal axis is the annual rate of growth in real GDP, on the vertical the change in the rate of unemployment (so that if unemployment goes from 5 to 6 percent, that’s a +1). I start with 1995 because that’s about when there seems to have been a pickup in underlying US productivity growth, making comparisons with earlier years problematic.

What you see is that unemployment tends to fall when growth is high, fall when it’s low or negative. You also see that growth has to be fairly fast — more than 2 percent — just to keep the unemployment rate from rising. Why? Well, productivity is rising, so that you can produce any given level of output with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, so you need positive employment growth just to keep unemployment from rising.That’s how you can have a technical recovery that feels like a recession: real GDP may be rising, but if it doesn’t rise at a sufficiently high rate, unemployment keeps going up.

Now, notice the red dot at the upper left. That represents what happened from 2008II to 2009II: a huge fall in real GDP, a huge rise in unemployment. Has the rise in unemployment been more than we should have expected, given the slump in GDP? Looking at the data, I don’t think there’s a strong case — not so much because of the numerical exercise I did in the earlier post, but because this recession is just completely on a different scale from anything we’ve seen for a long, long time. It’s hard to know what we should have expected.

And one last point: when I say that the rise in unemployment makes sense, I mean that it makes sense given the depth of the recession. It is, of course, completely crazy and disastrous from a larger point of view."

- Paul Krugman, http://krugman.blogs.nytimes.com/

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