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Get real perspective on America’s unemployment

Wells Fargo has a nice chart depicting the relationship between real GDP growth and the change of unemployment rate, the so-called Okun’s Law:

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The two are negatively correlated.  From regressional analysis, for unemployment rate to drop, the minimum real GDP growth rate required, on average, should be 3.4%. But the actual growth rate in 2011 was only 1.6%.  So why have we been witnessing a drop of unemployment rate anyway?

The breakdown of this long-run relationship may be due to the drop of participation rate in labor market. The real unemployment rate, taking participation rate into account, should be much higher.

As shown in the graph, the current change of unemployment rate would require a much faster real GDP growth, at roughly 5%, three times of the current growth rate.




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