Macroeconomics in January, the Growth

Macroeconomics

In January, the growth rate of the GDP was 2.8%, revised in February to 3%. The growth rate of the GDP for the first quarter of 2012 was 2.2%. This represents a downward trend in GDP growth over the first three months of 2012, reversing the upward trend in GDP growth in the latter quarter of 2011. According to the BLS, the unemployment rate in January saw the unemployment rate at 8.3%, and in February this remained unchanged. The unemployment rate declined in March to 8.2%.

Okun's Law posits that unemployment can only improve so much given sluggish GDP growth (Burgen, Meyer & Tasci, 2012). The rationale behind this is that the unemployment rate depends on GDP growth. If the economy is not growing, then it is highly unlikely that employers will need to hire more workers. The link is also that if GDP growth is minimal, that this will not be sufficient overcome the increase in population, leaving unemployment stagnant at best.

Under Okun's Law, the recent decline in the GDP growth rate should result in an upward tick in the unemployment rate. The rate of growth in the U.S. economy is relatively slow, meaning that it is unlikely that any hiring in the economy would outstrip growth in the population. It would be expected that Okun's Law would hold in the current situation. However, that is not the case.

Walker (2012) mentions that many observers use Okun's Law to help predict unemployment given a specific GDP outlook. With the GDP outlook for sluggish growth, the unemployment rate was not expected to improve over the course of the first quarter of 2012. However, it did, and this was a surprise to many observers, who therefore feel that Okun's Law was broken in the U.S. economy over the past three months.

Burgen, Meyer and Tasci (2012) argue, however, that Okun's Law has not been broken, and that the pace of growth in the GDP is consistent with the decline in the unemployment rate. The nature of the ratio in Okun's Law is at issue in these different views about what the recent economic numbers mean for Okun's Law. The authors note that the most recent quarters' worth of performance fall on the trendline created by comparing the two figures.

Even if Okun's Law is broken, there are potential reasons for this. For example, a decline in the GDP growth rate could coincide with more people removing themselves from the workforce. The unemployment rate would not be improved by people finding work, but rather by people giving up. Another potential explanation, given that the unemployment improvements in the past couple of months have not been strong, is that GDP growth is falling in industries that hire fewer workers, while gaining in industries that hire more workers. This latter could actually be estimated with the most sophisticated set of BLS data.