Today’s GDP report estimated that the US economy grew at an annual rate of 2.5 percent in the first quarter of 2013. If the economy were translating GDP growth into jobs at rates similar to those seen in the past, this 2.5 percent pace would not get us to full employment until, say, the end of Hillary Clinton or Jeb Bush’s second term. But evidence suggests that, in fact, the link between output and jobs has been weakening for the past thirty years or so. In other words, we need higher growth rates today than we did thirty years ago to produce the same employment increases. In that context, 2.5 percent growth is nowhere near good enough.
In a new policy note, Michalis Nikiforos looks closely at US employment recovery (or lack thereof) after the “Great Recession.” In part, the dismal job creation record — which, says Nikiforos, is more accurately reflected by looking at the total number of employed workers rather than just the unemployment rate — is due to slow growth rates. Such slow growth is to be expected for an economy recovering from a financial crisis, he explains: “following the burst of a bubble and a financial crisis, the private sector seeks to minimize the debt it accumulated before the crisis. This leads to a large private sector financial surplus, which in turn weakens demand and thus output growth.”
But in addition to these slow growth rates, Nikiforos details the increasingly weak link between output growth and job creation: “[D]uring the recovery in the second half of the 1970s, a 1 percent increase in output led to an increase in employment of 0.714 percent. This number has been decreasing since the late 1970s and stands at 0.288 in the current recovery (i.e. 2009Q2–2012Q4).” In the policy note he runs through some possible reasons for this degraded link between output and jobs (including some research from a forthcoming paper by Deepankar Basu and Duncan Foley that points the finger at the growing share of the financial sector in GDP, which, they argue, leads to an overestimation of real economic activity). To give a sense of the challenge we’re facing, Nikiforos observes that just bringing the unemployment rate down to 5.5 percent by the end of 2014 would require the economy to grow at an annualized rate of 3.4 percent this year and 6.3 percent next year.
Read the policy note here.
(Note: this is a follow-up to the Levy Institute’s most recent Strategic Analysis.)