## Thursday, September 19, 2013

### Two Mismatches

Steve Waldman's key graph compares growth in the civilian labor force and growth of NGDP:

 Graph #1: Steve Waldman's Key Graph
Thinking about the things he's comparing -- labor force and output at actual prices -- Okun's law came to mind. Okun's law says there's a relation between employment and output. And SRW's graph says there's a relation between employment and output.

Maybe that's a little sloppy. The graph shows a relation between output and employment plus unemployment, where employed and unemployed people together make up the labor force. Still, there might be a relation...

Okun's laws says if unemployment goes up one percent then output goes down two percent. And if unemployment goes down one percent then output goes up two percent. Stuff like that.

If we have a population of 100 workers and 95 of then are working, then we have 5% unemployment. By Okun's law, if unemployment goes up then employment will go down. Suppose 50 people join the workforce and none of them get jobs. Now we have 55 people unemployed out of 150 workers. That's like 36% unemployment -- an increase of 31 percentage points.

Okun's law says for every percentage point unemployment goes up, output goes down two percentage points. So with a 31-point increase in unemployment, output should fall 62% Yikes! But obviously that's not right. Output doesn't drop just because people try to get jobs. So Okun's law really doesn't apply.

Also, apparently Okun's law applies to "real" (inflation-adjusted) output, not to the "nominal" (actual-price) output Steve Waldman is considering.

Then it occurred to me that, yes, SRW is considering nominal output, not real output. And that I had no idea what the ten-year growth rate of real output looks like. Maybe it looks like the nominal rate, only lower? Nope:

 Graph #2: 10-Year Growth Rates in the Civilian Labor Force (shaded) and RGDP (pink)
The civilian labor force pattern rises to a late-1970s peak and then declines, just as in Waldman's graph. But the pattern of RGDP is completely different. High early, in particular from the mid-1960s to the mid-1970s, and low thereafter.

Oddly, there is a low spot in the early years that's just as high as the plateau that runs from the latter 1970s to around 2006. And oddly, there is a brief low in the early 1980s -- looks like the combined effect of the 1974, 1980, and 1982 recessions -- that is higher that output has been since 2008.

But there's not much similarity between real output growth and labor force growth. Not that I see on this graph, anyway.

Steve Waldman said...

The motivation for showing NGDP was to show that monetary policy, under the measure market monetarists like, broadly tracked CLF growth. That is money was loose -- NGDP was high -- when CLF growth was strong. On a CLF-growth adjusted basis, money-as-measured-by-NGDP was not especially loose, although you pointed out correctly in comments that it was still a bit looser than historically.

There definitely was not intended to be a claim about real output there -- real output over the 70s was decent according to current norms, a bit better than the 1980s, a bit worse than the 1990s. But I don't claim that CLF, or even the number of employed persons, are the driver of real growth. On the contrary, my demographic account implies that there are bottlenecks to real-growth-per-employee when too may people try to work, so real growth fails to track employment growth. It's policy that tracked CLF growth, in order to absorb workers despite their inability to offer proportionate real production. Nominal growth substituted for real growth to enable employment, both by damping wages in real terms and by redistributing wealth from creditors and old workers to new labor market entrants.

The Arthurian said...

Hi Steve, thanks for the visit. And thanks for the clarification.

I think the difference between RGDP and NGDP in these graphs is evidence that "nominal growth substituted for real growth". That was my conclusion, but I cut that paragraph off. Oh, well.

The Arthurian said...

... the "mismatches" were in my thought process, not yours.