Department of "Huh?": Unemployment and GDP
8/5/09 10:31 PM
Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
Support this weblog | About This Website | About Brad DeLong | This Weblog | Weblog RSS feed | Brad DeLong's Egregious Moderation | Order of the Shrill | Office Hours: Evans 601, by appointment, email delong@econ.berkeley.edu | Academic C.V. | John Yoo and the Torture Memo | Audio and Video Read the comment policy: no drive-bys, and if you bring information and humor you will be fine... Department Dashboard Streamline department processes within your SharePoint environment. community.corasworks.net
Weblog Home Page Weblog Archives Econ 115: 20th Century Economic History Econ 211: Economic History Seminar Economics Should-Reads Political Economy Should-Reads Politics and Elections Should-Reads Hot on Google Blogsearch Hot on Google Brad DeLong's Egregious Moderation August 01, 2009
Department of "Huh?": Unemployment and GDP I don't grok Paul Krugman completely this morning. He writes: Growth and unemployment: What you see is that unemployment tends to fall when growth is high, fall rise when it’s low or negative. You also see that growth has to be fairly fast — more than 2 percent [per year] — just to keep the unemployment rate from rising. Why? Well, productivity is rising, so that you can produce any given level of output with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, http://delong.typepad.com/sdj/2009/08/department-of-huh-unemployment-and-gdp.html
Page 1 of 5
Department of "Huh?": Unemployment and GDP
8/5/09 10:31 PM
with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, so you need positive employment growth just to keep unemployment from rising. That’s how you can have a technical recovery that feels like a recession: real GDP may be rising, but if it doesn’t rise at a sufficiently high rate, unemployment keeps going up.... Has the rise in unemployment been more than we should have expected, given the slump in GDP? Looking at the data, I don’t think there’s a strong case — not so much because of the numerical exercise I did in the earlier post, but because this recession is just completely on a different scale from anything we’ve seen for a long, long time. It’s hard to know what we should have expected. And one last point: when I say that the rise in unemployment makes sense, I mean that it makes sense given the depth of the recession. It is, of course, completely crazy and disastrous from a larger point of view.
I get the point that we are at the edge of the scatter right now, and hence it is "hard to know what we should have expected." But we did expect the relationship to be roughly linear--and it does look like we are high on the change-in-unemployment by an amount that is certainly economically if not statistically significant. Should we have expected a nonlinearity in Okun's Law to emerge at the left end? I know that I didn't. Would I have if I were not a bear of very little brain? I'll have to think about this for a while... Update: Gah! The horizontal axis is not the 8 quarter growth in GDP but the average annual growth rate over those 8 quarters... RECOMMENDED (5.0) by 2 people like you [How? ] You might like: http://delong.typepad.com/sdj/2009/08/department-of-huh-unemployment-and-gdp.html
Page 2 of 5
Department of "Huh?": Unemployment and GDP
8/5/09 10:31 PM
Opinions of Shape of Earth Don't Differ (@this site) A Request for Help on CBO and Health Costs (@this site) 2 more recommended posts Âť Brad DeLong on August 01, 2009 at 10:32 AM in Economics, Economics: Labor, Economics: Macro | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f08003883401157250b49f970b Listed below are links to weblogs that reference Department of "Huh?": Unemployment and GDP:
Comments You can follow this conversation by subscribing to the comment feed for this post. I would love to see that chart broken down into 10-year periods from 1948 to see if the slope of that line has changed over time. We have just-in-time ordering, maybe we also now have just-in-time firing and hiring. Posted by: Steve Zorowitz | August 01, 2009 at 10:57 AM If you remove the few points with high economic growth, your regression line will move closer to the current data point. I would expect the nonlinearity at the right end is what is driving things. Posted by: David Einstein | August 01, 2009 at 10:57 AM Usually, productivity drops going into an unemployment raising slump and goes back up coming out of it. This makes sense given the qualitative explanation often given of Okun's Law for recessions, that employers cling to employee's (and capacity). This behavoir is inefficient in the short term, hence productivity goes down. But right now, productivity growth is still only a bit under 2.5, pretty high. (And that's despite a big shift to lower productivity service sector jobs to boot.) I would inexpertly speculate that this means that we've been seeing harsher cutbacks then would be proportional. Here's a FRED graph: http://tinyurl.com/mmqccn The only other case where productivity growth stayed high going into an employment slump appears to be 2001, so there is some reason to Paul's choice to only use recent data for comparison. Of course, in order to bring productivity down the roughly 0% that was typical back in Okun's day, employment would need to improve by much more then the missing .6%, so clearly layoff's aren't the entire story to why productivity is high. Posted by: John Whitesell | August 01, 2009 at 01:40 PM There is certainly a hint that the slope of the "real" curve might be greater on the left side. And the only end point that I as an noneconomist would be comfortable predicting is, if GDP were zero, then employment would also be zero. I think that implies that at high rates of economic shrinkage the slope must increase somewhere on the left side of the graph. But without theoretical quidance as to how and roughly where the bend in the curve should be, I wouldn't want to try to pin it down with such noisey data. Posted by: bigTom | August 01, 2009 at 01:40 PM Maybe there is a practical/historical explanation. If unemployment is particularly high among unproductive people under current conditions, doesn't that cause unemployment to rise faster than expected based on the drop in GDP? Unemployment is particularly high among builders of suburban tract homes. This was a supremely unwise societal investment that created lots of externalities ranging from longer commute times to blowing up the banking system. It should not be so surprising that doing less of it doesn't hurt GDP as much as doing less of something else that doesn't suck quite as much. Unemployment also seems to be particularly high right now among rent seeking parasites like bankers and brokers. Some of their services count as GDP, which should make us question whether GDP really means anything at all, but if the same services can be performed in a less "innovative" manner by fewer people, then don't we get more unemployment than expected based on the drop in http://delong.typepad.com/sdj/2009/08/department-of-huh-unemployment-and-gdp.html
Page 3 of 5
Department of "Huh?": Unemployment and GDP
8/5/09 10:31 PM
performed in a less "innovative" manner by fewer people, then don't we get more unemployment than expected based on the drop in GDP? The more I think about it, the more I think we should expect a smile shape. The extreme right end represents adding an enormous amount of bullshit to GDP, which can be accomplished by about five people with computers at Goldman Sachs and AIG, so the change in employment is relatively small. The extreme left end represents people and firms under enough stress that they are getting serious about separating the sheep from the goats, making fundamental changes and getting rid of unproductive people and enterprises, so the change in employment is relatively large. The remarkable thing is that the economy in the US has been so moderate since 1948 that we've barely touched the areas where the curve is apparent. Posted by: albrt | August 01, 2009 at 04:49 PM Interesting line of thinking, albrt but I don't think GDP makes moral judgements. Certainly there are economic repercussions to bad investment however GDP is a measurement of the now, not of the results. So GDP shouldn't really show any difference between a person losing their job making a useless widget and a useful widget, all GDP is going to reflect is that the price of all widget's being made is lower. Posted by: John Whitesell | August 01, 2009 at 06:53 PM I was just over at Paul's and I think he explained his methogology (such as it is). He asserts there was a productivity speed up in 1995 so older data don't count. One might counterargue that if you admit only 2 data points there will be a linear relationship, but he did make the argument. I might add that you and I predicted a convexity at high unemployment (in the USA) which is exactly what the data show. http://ideas.repec.org/a/fip/fedfer/y1997p33-52n1.html Also you and Summers say what matters is the output gap calculated your way which you can't calculate until there is a new peak (although, just to comment from out in the gamma quadrant, you could bring back the gamma functions). We are currently very far below the last peak, so you and Larry say unemployment should be very high. Basically your argument IIRC was that raw growth mixes high demand and high technological progress and high demand has more effect on unemployment for a given effect on growth. This deals with Krugman's concern in a legitimate way. Does it provide an explanation for the current unemployment rate ? Posted by: robert waldmann | August 01, 2009 at 07:08 PM That is a nice plot. I would love it if you connected the dots with line segments sequentially through time. I think Krugman's point was that the line shifted out due to productivity change. Connecting the dots would help us to see whether/how-much that was true. Posted by: Michael Roberts | August 01, 2009 at 07:17 PM J. Whitesell: Thanks for the response. The moral judgment is mine, not the economy's. I would consider putting my comments in neutral terms if I were paid to do so, but I'm not. If I understand correctly, this graph incorporates a two year lag, plenty of time for the economy to make a judgment as to whether the currently unemployed people were doing something useful during the previous two years or not. If the currently unemployed people were producing useful widgets, the GDP is down the value of the widgets plus the value of what would have been done with the widgets. Causation may be difficult to track anecdote-wise, but the correlation is likely to show up within two years. If the currently unemployed people were making Beanie Babies, the GDP is down the "value" of the beanie babies, plus an extremely small amount representing the services of somebody who has something to do with Hallmark stores. Causation still may not be evident, but somebody has judged well and GDP is not down quite so much per lost job.
http://delong.typepad.com/sdj/2009/08/department-of-huh-unemployment-and-gdp.html
Page 4 of 5
Department of "Huh?": Unemployment and GDP
8/5/09 10:31 PM
It still seems to me that the interesting part is the middle. I think I will call it the Dilbert zone, because Scott Adams captures the functioning of the post-war American economy so well. The economy is stable and the penalties of bad decisions aren't too severe. The Peter principle working at full strength and job losses occur for a nearly random mix of bad reasons and good reasons, leading to a roughly linear relationship between job losses and production. The right end is the Goldman Sachs zone, because the increases in GDP contain larger and larger amounts of Wall Street bezzle. This has an increasingly tenuous correlation with anything in the real economy, including jobs, and eventually reaches the point where it is seriously destructive, causing sudden leaps back to the other end of the curve. That means the left end is the Darwin zone, because in a seriously stressful and competitive environment, there is at least some tendency for natural selection to operate. I would like to see the graph plotted with the points different colors for presidential administrations. Posted by: albrt | August 01, 2009 at 08:33 PM
Verify your Comment Previewing your Comment Posted by: | This is only a preview. Your comment has not yet been posted. Post
Edit
Your comment could not be posted. Error type: Your comment has been posted. Post another comment The letters and numbers you entered did not match the image. Please try again. As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments. Having trouble reading this image? View an alternate. Continue
Me:
Economists: Paul Krugman Mark Thoma Cowen and Tabarrok Chinn and Hamilton Brad Setser
Juicebox Mafia: Moral Ezra Klein Philosophers: Matthew Yglesias Hilzoy and Spencer Friends Ackerman Crooked Timber Dana Goldstein of Humanity Dan Froomkin Mark Kleiman and Friends Eric Rauchway and Friends John Holbo and Friends
http://delong.typepad.com/sdj/2009/08/department-of-huh-unemployment-and-gdp.html
Page 5 of 5