The Broken Link Between Jobs and Growth

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Would-be workers lined up at a job expo early this year.

As the jobless rate continues to fall, a lot of people have found themselves wondering how the U.S. economy is producing jobs when it’s actually not growing all that much.  Planet Money sums up the puzzle with this pithy question: “What’s The Opposite Of A Jobless Recovery?”

As background, The Wall Street Journal offers this helpful walk-through of what economists call “Okun’s Law.”

“Back in 1962, Yale University economist Arthur Okun described a long-running relationship between economic growth and jobs. When the economy grew faster than its long-run trend, the unemployment rate tended to fall by about half as much as the additional growth in percentage terms. So growth of 3.5% in a year—one percentage point above a long-run trend of 2.5%—would bring down the unemployment rate by a half percentage point in that year. And it worked the same way in reverse. Growth one percentage point below trend would push the unemployment rate up half a percentage point.” — The Wall Street Journal

The confounding thing, the article goes on, is that Okun’s Law isn’t reliable right now.  Unemployment has dropped, while economic growth has been modest.  What’s going on?

According to the WSJ piece, there are a few possibilities: declining productivity, for example, or reliance on growth data that could be revised.  Another explanation is that companies, spooked by the financial crisis, overreacted and fired more workers than they had to.  Now, they’re stabilizing and filling some of those positions.  The worrisome thing about that is that hiring could stall, leaving unemployment stuck at relatively high rate.

So what do Idaho’s growth and unemployment numbers tell us? As the Idaho Department of Labor recently said, the state’s average unemployment rate last year was 8.8 percent, which is actually a tenth of a point higher than it was in 2010.  That said, 2011 ended better than it began, with December’s rate reaching a year-long low of 8.3 percent.

The federal Bureau of Economic Analysis hasn’t yet released its Gross State Product calculations for 2011.  If Okun’s Law holds, though, Idaho will have to see growth in the neighborhood of 6.5 percent in order for unemployment to fall to about six percent over the next year.  That’s more than three times the growth rate in 2010.  In other words, let’s hope Okun’s Law stays unreliable for a while longer.