Note: the last four quarters have seen real GDP grow at a rate of 3.4% per year, and have also seen the unemployment rate rise from 5.7% to 6.1%.
Our old Okun's Law rule-of-thumb would take these numbers and say that they indicate that potential output growth is 4.4% per year--that as long as real GDP growth is less than 4.4% per year, the unemployment rate will keep rising. And it would say that to get the unemployment rate down to... pick a number... 5.5% by a year from now, we would have to see real GDP growth accelerate to 6.9% over the next year starting now.
But these numbers are so far outside historical experience that nobody I can find will say that they still believe in our old Okun's Law rule-of-thumb that the change in the unemployment rate over a year is -0.4 times that year's excess or deficiency of real GDP growth relative to potential output growth.
Posted by DeLong at October 31, 2003 04:18 PM | TrackBack
Bruce Bartlett points us at the Fair Model, http://fairmodel.econ.yale.edu/memo/fm.htm, which predicts real GDP growth of 3.9% over the next year and a decline of the unemployment rate to 5.0%--corresponding to an Okun's Law-definition rate of growth of potential output of only 1.8%.
And yes indeed, Ray Fair is expecting productivity to fall in each quarter of next year--for Ray Fair does not believe in a "new economy" and looks at the late 1990s boom as nothing more than the reflection of the stock market bubble...
Posted by: Brad DeLong on October 31, 2003 05:32 PMThat's not fair. How can I be the first to post a comment if you post comments yourself ?
How can Fair claim that the late 90's boom was just a bubble, that is, that there was no true sustainable productivity speed up given that the productivity speed up has continued into the 0's ? Not
Posted by: Robert on October 31, 2003 06:10 PMWell, his model predicts that the recent productivity growth is about to be undone as whatever unmodeled special factors that produce it go away.
And you were going to tell me about your pagerank...
Posted by: Brad DeLong on October 31, 2003 06:17 PM3.4% has been the compound growth rate for real GDP since the end of WW II. So last year was average. it is like the great claims for job growth under Reagan when actually job growth during his admin was exactly the average as under all administrations from Ike to Clinton.
The problem with Okum's law, potential GDP, etc., is that they depend on a stable rate of productivity growth. But since productivity growth
varies on both a cyclical and secular basis, the averages behind such laws will be too
low at some points and too high at other times.
Moreover, productivity growth is highly cyclical. In the typical cycle the economy has one year of very strong above trend productivity during the recovery phase, and slows to below trend during the expansion phase.
The St. Louis FED has a series called GDPPOT which it attributes to CBO that suggests a GDP gap less than 1.7%. It seems to be based on a NAIRU of 5.5%. When was this series devised? Any information or insights on it?
Posted by: Harold McClure on November 1, 2003 06:44 AMI have a question about this whole productivity thing. Is there any economic theory that explains rises in productivity being loosely linked to rising unemployment? I.e., if I see that the job market out there is dismal, and my boss says to me "Ken, you're not pulling your weight around here; we expect more from you." then I'll feel more inclined to put my shoulder to the wheel than walk out and find another job? Or is that sort of thing not considered statistically significant?
As you can guess, I've never studied anything remotely economics-related.
Posted by: Ken Overton on November 1, 2003 11:59 AMKen:
actually, productivity is a strange beast that both causes growth and that is caused by growth. Because of this it is a great leading indicator. At cyclical turning points, both peaks & bottoms, employers are slow to respond to changes in demand-production- by changing employment -- they fear that the demand shift may be temporary and adding or firing employees is expensive and disruptive. At bottoms and early in the cycle productivity surges because of this. But at peaks, productivity slows because of the reverse development. So there is a loose correlation between productivity and economic slack, ie. the unemployment rate. But the causal relationship has little or nothing to do with it.
Ken:
my first comment about productivity was largely about cyclical productivity. On a secular basis productivity stems mostely from high productivity industries displacing low productivity industries. Since 1995 when the current rebound in productivity growth started some 0ne-third to 0ne-half of the productivity improvement has been because of the faster growth of high tech industries. During the bubble industrial production of high tech grew at about a 40% rate while industrial production of all other had low single digit growth. Over the past year, ind.production of semiconductors grew 25%, computers 15% and autos only 5%. No other industrial production componenet had significant growth. productivity in high tech is much higher than in traditional industries so most of manufacturing productivty growth stemmed from high tech displacing other manufacturing. Interestingly, Walmart is a major factor in the recent productivity rebound Since 1995 retail productivity growth has actually been stronger than manufacturing productivity growth and in the aggregate productivity data retail now has about a 20% weight while manufacturing only accounts for about 15% of the total hours worked used in calculating productivty. Walmart displacing other retailers and forcing them to become more productive may be the single most important factor in the post-1995 productivity rebound.