Arnold Kling  

The Great Okun's Law Violation

Another Post on EFC... Confirmation for Baumeister's ...

Steve Lohr writes,

During the last recession, the authors write, one in 12 people in sales lost their jobs, for example. And the downturn prompted many businesses to look harder at substituting technology for people, if possible. Since the end of the recession in June 2009, they note, corporate spending on equipment and software has increased by 26 percent, while payrolls have been flat.

He refers to a new e-book by Erik Brynjolfsson and Andrew P. McAfee. Thanks to Mark Thoma for the pointer. Tyler Cowen spotted it also, and he may very well say more before this post goes up. I have not read the new e-book, but by all accounts it squares more with my view than with Tyler's. That is, as the authors remark,

The stagnation in median income and employment is not because of a lack of technological progress. On the contrary, the problem is that our skills and institutions have not kept up with the rapid changes in technology.

And in the earlier article on their work:

Productivity growth in the last decade, at more than 2.5 percent, they observe, is higher than the 1970s, 1980s and even edges out the 1990s. Still the economy, they write, did not add to its total job count, the first time that has happened over a decade since the Depression.

If that is accurate, then it is inconsistent with Okun's Law, which connects GDP with employment. One may choose to view recent trends as combining a Great Okun's Law Violation with a Great Factor-Price Equalization.

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COMMENTS (5 to date)
Brock writes:

What violation? Okun's law is the connection between unemployment and potential GDP. Just think how much higher our GDP would be if our citizens had the skills to productively contribute to Moore's Economy.

Whether an unemployment increase causes a net GDP decrease depends on productivity offsets during the same time period.

[Spelling of Okun corrected.--Econlib Ed.]

Noah Yetter writes:

"Okun's Law" should not be called a law, it is a theorem at best. It is a mere observed empirical regularity with no theoretical underpinnings. Compare to, for example, the Law of Demand, or Gresham's Law, which hold 100% of the time.

Floccina writes:

My thoughts are similar to yours. It seems to me that some technology leads to more demand for labor Like a new better type of washing machine that everyone feels that they must have. Other technology may lead to less demand for labor by eliminating jobs faster that they can added by new industries. I think that the internet has lead to rapid elimination in marketing ans sales. For a while real estate took up the slack.

Jonathan Bechtel writes:


I tend to agree. Instead of expanding production, technology today zaps out inefficiencies, creating less need to hire people.

I think institutional sclerosis is a bigger issue than stagnation. Technology today puts downward pressure on institutional inefficiences, and it's beginning to show.

Arnold, have you read opinions by Michael Spence on this issue? He seems to have similar opinions to you.

Nicholas Weininger writes:

Doesn't the Japanese experience bear this out too? Huge increases in automation of daily life beyond what we've yet seen here, huge problems increasing employment.

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