The Australian National Accounts data came out this week and the federal government maintained its assertion that the annualised growth rate revealed (3.1 per cent) was around the trend established over the last decade (3.2 per cent). They reaffirmed their policy aim, which is to keep real GDP growth at that trend rate. If labour productivity grows at 1.5 per cent per annum and the labour force grows at 2 per cent per annum and the average working week is constant in hours, then this policy (if successful) will see the unemployment rate rising.
Answer: True
The answer is True.
The facts were:
Of-course, the trend rate of real GDP growth doesn't relate to the labour market in any direct way. The late Arthur Okun is famous (among other things) for estimating the relationship that links the percentage deviation in real GDP growth from potential to the percentage change in the unemployment rate - the so-called Okun's Law.
The algebra underlying this law can be manipulated to estimate the evolution of the unemployment rate based on real output forecasts.
From Okun, we can relate the major output and labour-force aggregates to form expectations about changes in the aggregate unemployment rate based on output growth rates. A series of accounting identities underpins Okun's Law and helps us, in part, to understand why unemployment rates have risen.
The approximate rule of thumb that is derived from Okun's law is that if the unemployment rate is to remain constant, the rate of real output growth must equal the rate of growth in the labour-force plus the growth rate in labour productivity.
It is an approximate relationship because cyclical movements in labour productivity (changes in hoarding) and the labour-force participation rates can modify the relationships in the short-run. But it provides reasonable estimates of what happens when real output changes.
The sum of labour force and productivity growth rates is referred to as the required real GDP growth rate - required to keep the unemployment rate constant.
Remember that labour productivity growth (real GDP per person employed) reduces the need for labour for a given real GDP growth rate while labour force growth adds workers that have to be accommodated for by the real GDP growth (for a given productivity growth rate).
So in the example, the required real GDP growth rate is 3.5 per cent per annum and if policy only aspires to keep real GDP growth at its trend growth rate of 3.2 per cent annum, then the output gap that emerges is 0.3 per cent per annum.
The unemployment rate will rise by this much (give or take) and reflects the fact that real output growth is not strong enough to both absorb the new entrants into the labour market and offset the employment losses arising from labour productivity growth.
The question has practical relevance in Australia at present. The fact is that the trend growth rate is below the required growth rate and so the contractionary fiscal and monetary policy stance now being pursued by the government is really locking the economy into an unemployment rate that is higher than otherwise.
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