Growth and Unemployment

Compared to Figure 8-1, Figure 8-4 shows the U.S. unemployment rate over a somewhat shorter period, the 35 years from 1979 through late 2014. The shaded bars represent periods of recession. As you can see, during every recession, without exception, the unemployment rate rose. The severe recession of 2007–2009, like the earlier one of 1981–1982, led to a huge rise in unemployment.

Unemployment and Recessions, 1979–2014 This figure shows a close-up of the unemployment rate for the past three decades, with the shaded bars indicating recessions. It’s clear that unemployment always rises during recessions and usually falls during expansions. But in both the early 1990s and the early 2000s, unemployment continued to rise for some time after the recession was officially declared over. Sources: Bureau of Labor Statistics; National Bureau of Economic Research.

Correspondingly, during periods of economic expansion the unemployment rate usually falls. The long economic expansion of the 1990s eventually brought the unemployment rate to 4.0%, and the expansion of the mid-2000s brought the rate down to 4.7%. However, it’s important to recognize that economic expansions aren’t always periods of falling unemployment. Look at the periods immediately following the recessions of 1990–1991 and 2001 in Figure 8-4. In each case the unemployment rate continued to rise for more than a year after the recession was officially over. The explanation in both cases is that although the economy was growing, it was not growing fast enough to reduce the unemployment rate.

Figure 8-5 is a scatter diagram showing U.S. data for the period from 1949 to 2013. The horizontal axis measures the annual rate of growth in real GDP—the percent by which each year’s real GDP changed compared to the previous year’s real GDP. (Notice that there were ten years in which growth was negative—that is, real GDP shrank.) The vertical axis measures the change in the unemployment rate over the previous year in percentage points—last year’s unemployment rate minus this year’s unemployment rate. Each dot represents the observed growth rate of real GDP and change in the unemployment rate for a given year. For example, in 2000 the average unemployment rate fell to 4.0% from 4.2% in 1999; this is shown as a value of −0.2 along the vertical axis for the year 2000. Over the same period, real GDP grew by 3.7%; this is the value shown along the horizontal axis for the year 2000.

Growth and Changes in Unemployment, 1949–2013 Each dot shows the growth rate of the economy and the change in the unemployment rate for a specific year between 1949 and 2013. For example, in 2000 the economy grew 3.7% and the unemployment rate fell 0.2 percentage points, from 4.2% to 4.0%. In general, the unemployment rate fell when growth was above its average rate of 3.25% a year and rose when growth was below average. Unemployment always rose when real GDP fell. Sources: Bureau of Labor Statistics; Bureau of Economic Analysis.

The downward trend of the scatter diagram in Figure 8-5 shows that there is a generally strong negative relationship between growth in the economy and the rate of unemployment. Years of high growth in real GDP were also years in which the unemployment rate fell, and years of low or negative growth in real GDP were years in which the unemployment rate rose.

The green vertical line in Figure 8-5 at the value of 3.25% indicates the average growth rate of real GDP over the period from 1949 to 2013. Points lying to the right of the vertical line are years of above-average growth. In these years, the value on the vertical axis is usually negative, meaning that the unemployment rate fell. That is, years of above-average growth were usually years in which the unemployment rate was falling. Conversely, points lying to the left of the green vertical line were years of below-average growth. In these years, the value on the vertical axis is usually positive, meaning that the unemployment rate rose. That is, years of below-average growth were usually years in which the unemployment rate was rising.

A jobless recovery is a period in which the real GDP growth rate is positive but the unemployment rate is still rising.

A period in which real GDP is growing at a below-average rate and unemployment is rising is called a jobless recovery or a “growth recession.” Since 1990, there have been three recessions, each of which was followed by a period of jobless recovery. But true recessions, periods when real GDP falls, are especially painful for workers. As illustrated by the points to the left of the purple vertical line in Figure 8-5 (representing years in which the real GDP growth rate is negative), falling real GDP is always associated with a rising rate of unemployment, causing a great deal of hardship to families.

ECONOMICS in Action: Failure to Launch

Failure to Launch

In March 2010, when the U.S. job situation was near its worst, the Harvard Law Record published a brief note titled “Unemployed law student will work for $160K plus benefits.” In a self-mocking tone, the author admitted to having graduated from Harvard Law School the previous year but not landing a job offer. “What mark on our résumé is so bad that it outweighs the crimson H?” the note asked.

Unemployment Rate for Recent College Graduates, 2007–2011 Source: Bureau of Labor Statistics.

The answer, of course, is that it wasn’t about the résumé—it was about the economy. Times of high unemployment are especially hard on new graduates, who often find it hard to get any kind of full-time job.

How bad was it around the time that note was written? Figure 8-6 shows unemployment rates for two kinds of college graduates—all graduates 25 and older, and recent graduates in their 20s—for each year from 2007 to 2011. Even at its peak, in October 2009, the unemployment rate among older graduates was less than 5 percent. Among recent graduates, however, the rate peaked at 15.5 percent, and it was still well into double digits in late 2011. The U.S. labor market had a long way to go before being able to offer college graduates—and young people in general—the kinds of opportunities they deserved.

Quick Review

  • The labor force, equal to employment plus unemployment, does not include discouraged workers. Nor do labor statistics contain data on underemployment. The labor force participation rate is the percentage of the population age 16 and over in the labor force.

  • The unemployment rate is an indicator of the state of the labor market, not an exact measure of the percentage of workers who can’t find jobs. It can overstate the true level of unemployment because workers often spend time searching for a job even when jobs are plentiful. But it can also understate the true level of unemployment because it excludes discouraged workers, marginally attached workers, and underemployed workers.

  • There is a strong negative relationship between growth in real GDP and changes in the unemployment rate. When growth is above average, the unemployment rate generally falls. When growth is below average, the unemployment rate generally rises—a period called a jobless recovery that typically follows a deep recession.

8-1

  1. Question 8.1

    Suppose that the advent of employment websites enables job-seekers to find suitable jobs more quickly. What effect will this have on the unemployment rate over time? Also suppose that these websites encourage job-seekers who had given up their searches to begin looking again. What effect will this have on the unemployment rate?

  2. Question 8.2

    In which of the following cases is a worker counted as unemployed? Explain.

    1. Rosa, an older worker who has been laid off and who gave up looking for work months ago

    2. Anthony, a schoolteacher who is not working during his three-month summer break

    3. Grace, an investment banker who has been laid off and is currently searching for another position

    4. Sergio, a classically trained musician who can only find work playing for local parties

    5. Natasha, a graduate student who went back to school because jobs were scarce

  3. Question 8.3

    Which of the following are consistent with the observed relationship between growth in real GDP and changes in the unemployment rate as shown in Figure 8-5? Which are not?

    1. A rise in the unemployment rate accompanies a fall in real GDP.

    2. An exceptionally strong business recovery is associated with a greater percentage of the labor force being employed.

    3. Negative real GDP growth is associated with a fall in the unemployment rate.

Solutions appear at back of book.