Arnold Kling  

GDP and Employment in the Current Cycle

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The latest GDP revisions have tightened the relationship between employment and GDP in this cycle compared to the unrevised data. Some advocates of an AD-AS story are ready to say, "Nothing structural to see here. The aggregate production function is alive and well. Move along." But check out these charts, from Calculated Risk.

I am mentally trying to overlay the GDP chart and the employment chart. Until the two most recent recessions, the bottoms of the icicles look similar. That is, if GDP bottoms out at 97 percent of peak, then employment bottoms out at about 97 percent of GDP. But the two most recent recessions are different.

I think that one can still make a good case that a lot of current unemployment is structural. I have nothing against trying an all-out monetary expansion to try to see what it can do, because I think that the long-run inflation danger is fiscal, not monetary. But I think that ongoing factor-price equalization is the main labor market story of this century.


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COMMENTS (7 to date)
Noah Yetter writes:

"I have nothing against trying an all-out monetary expansion to try to see what it can do, because I think that the long-run inflation danger is fiscal, not monetary."

I don't understand. The cause of inflation is always monetary. What are you getting at here?

david nh writes:
The latest GDP revisions have tightened the relationship between employment and GDP in this cycle compared to the unrevised data. Some advocates of an AD-AS story are ready to say, "Nothing structural to see here. The aggregate production function is alive and well. Move along."

Hmm. Don't get it. I see no inconsistency between a) a structural recession story, and b) a tight relationship between employment and GDP. Both GDP and unemployment have been affected by discoordination due to malinvestments (exacerbated perhaps by bad monetary policy). The discoordinating effect of the subsequent fiscal stimulus and regime uncertainty keeps things bad by polluting/obscuring market signals, preventing equilibration and elevating money demand.

Joe Cushing writes:

Noah,

I'm going to take a guess at what he means. He is saying that although inflation is always monetary, monetary follows fiscal. In other words, when the fiscal sides runs out of money, they will get the fed to print it. This is what every country does when they have fiat money.

I doubt there has ever been a major inflation without this process happening. That said, there is no reason to think that intentionally inflating can't cause measured inflation too. You don't have to have a fiscal crises to have hyperinflation. All you have to do is print.

Dave writes:

If employment is returning to different occupations at different rates, wouldn't that suggest structural unemployment?

For instance, maybe the number of manufacturing workers is at 92% of pre-recession highs, but the number of construction workers is at 80%. I'm making up that data, but I think that's the type of discrepancy I'd look for.

Arnold Kling writes:

Noah and Joe,
Joe has my answer. If there has been an episode of inflation rates of 100 percent or more that was not driven by a big fiscal gap, I would like to hear about it.

Mr. Econotarian writes:

Check out Mark Perry's graph on education level vs. employment levels for this recession.

Arthur_500 writes:

There is no question that unemployment is structural. We continue to replace workers with technology and we need new ideas for employment.

All the current taalk about businesses hiring more employees is foolish. Existing businesses should not go bankrupt because they are doing some sort of civic duty to hire unnecessary employees.

Rather we need new growth in our economy. We need some new ideas on how to make money. Until we invent these new ideas we will remain with high unemployment.

manufacturing employees are replaced by machines. I use far fewer employees in my business than we did only ten years ago. Even in constrution you find air hammers replacing regular hammers and making crews more efficient meaning fewer employees.

We need to invent more and cry less.

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