Wikinvest Wire

Disconnect between growth and employment

Thursday, July 23, 2009

The Wall Street Journal reports($) on the "unusual" relationship between economic growth and the labor market during the current recession.

Job Cuts Outpace GDP Fall

The job market is doing even worse than the overall economy, prompting concern inside and outside the government that deeper-than-expected joblessness could persist once the recession ends.

Breaking from historical patterns, the unemployment rate -- currently at 9.5% -- is one to 1.5 percentage points higher than would be expected under one economic rule of thumb, says Lawrence Summers, President Barack Obama's top economic adviser.
Employers' unusual behavior seems to have intensified as the economy has stabilized. When the government releases its estimate of second-quarter gross domestic product next week, economists expect it will show a contraction of less than 2% at an inflation-adjusted annual rate. During the same three months, employers cut payrolls at an annual rate of more than 4%, eliminating 1.3 million more jobs.

That kind of disconnect violates an economic rule of thumb called Okun's Law, after the late economist Arthur Okun, which holds that every two-percentage-point drop in the economic-growth rate corresponds with a one-percentage-point rise in the unemployment rate.
Get ready to start reading headlines like, "The Recession is Over. So What?"


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