SLIDE 1
Comments on Bob Hall
“Why Has the Unemployment Rate Fared Better than GDP Growth?”
John Fernald
October 14, 2016
My thanks to FRBSF colleagues for helpful conversations in recent years about the issues in this discussion. But the views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System
SLIDE 2 Unemployment rate is where it was in 2007 …but output growth has disappointed
Paper
- Uses Okun’s Law to control
for the cycle
- Growth-accounting for non-
cyclical output shortfall:
– Labor (LFPR, working-age population) – TFP – Capital
0.5 1 1.5 2 2.5 3 3.5 4 4.5 1947-73 1973-95 1995-04 2004-07 2007-16
Source: Fernald (2014a), BEA, BLS. Quarterly; samples end in Q4 of years shown except 1973 (end Q1) and 2016 (ends Q2). Output averages income and expend.
Average annualized growth rate
Business-sector output growth
Percent
SLIDE 3 My take: Slow growth from demographics and productivity— not Great-Recession
- Okun’s Law was normal (with
low potential)
productivity are slow
- Best guess: slow growth the
new reality
0.5 1 1.5 2 2.5 3 3.5 4 4.5 1947-73 1973-95 1995-04 2004-07 2007-16
Source: Fernald (2014a), BEA, BLS. Quarterly; samples end in Q4 of years shown except 1973 (end Q1) and 2016 (ends Q2). Output averages income and expend.
Average annualized growth rate
Business-sector output growth
Percent
SLIDE 4 My take: Slow growth from demographics and productivity— not Great-Recession
- Okun’s Law was normal (with
low potential)
productivity are slow
- Best guess: slow growth the
new reality
0.5 1 1.5 2 2.5 3 3.5 4 4.5 1947-73 1973-95 1995-04 2004-07 2007-16
Source: Fernald (2014a), BEA, BLS. Quarterly; samples end in Q4 of years shown except 1973 (end Q1) and 2016 (ends Q2). Output averages income and expend.
Average annualized growth rate
Business-sector output growth
Hours Labor Prod.
Percent
SLIDE 5
Okun’s Law consistent with low potential
SLIDE 6
Hall, p.2: “U.S. Experience since the crisis is a major deviation from [Okun’s] Law”
(From Daly, Fernald, Jorda, and Nechio, 2013)
SLIDE 7
Hall, p.2: “U.S. Experience since the crisis is a major deviation from [Okun’s] Law”
(From Daly, Fernald, Jorda, and Nechio, 2013)
SLIDE 8
Okun like previous recessions…but with low potential growth
(From Daly, Fernald, Jorda, and Nechio, 2013)
SLIDE 9
Okun like previous recessions…but with low potential growth
(From Daly, Fernald, Jorda, and Nechio, 2013)
SLIDE 10
Okun like previous recessions…but with low potential growth
(From Daly, Fernald, Jorda, and Nechio, 2013)
SLIDE 11
Okun like previous recessions…but with low potential growth
(From Daly, Fernald, Jorda, and Nechio, 2013)
SLIDE 12
Okun “loops” come from TFP
SLIDE 13
Okun “loops” come from TFP
13
SLIDE 14
Why has potential growth been so slow since 2007?
SLIDE 15 Has cyclical become structural? Maybe for hours…
975 1985 1995
975 1985 1995 2
SLIDE 16 Has cyclical become structural? Maybe for hours…
975 1985 1995
975 1985 1995 2
SLIDE 17 Has cyclical become structural? Maybe for hours…
975 1985 1995
975 1985 1995 2
SLIDE 18
- Oulton and Sebastia-Barriel (2013)
– For advanced economies, financial crises do not permanently affect level of TFP or labor productivity – Employment per capita is permanently lower
- Huang, Luo, and Startz (2015)
– TFP level recovers rapidly after all U.S. recessions – Hours worked no longer recovers (L-shaped)
- But U.S. employment growth would have slowed anyway
– Krueger (2016), Gagnon, Johannsen, and Lopez-Salido (2016)
Has cyclical become structural? Maybe for hours…
SLIDE 19 Slowing labor-force growth not (just) the Great Recession
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 950 1960 1970 1980 1990 2000 2010 2020 2030 labor force
SLIDE 20 TFP has been consistent (and slow)
0.5 1 1.5 2 2.5 3 3.5
Source: Fernald (2014a). Quarterly; samples end in Q4 of years shown except 1973 (end Q1) and 2016 (end Q2). Capital deepening is contribution of capital relative to quality-adjusted hours. Total factor productivity measured as a residual.
Business sector, percent change, annual rate
Contributions to growth in U.S. output per hour
Percent
1947-73 1973-95 1995-04 2004-07 '07-10 '10-16
SLIDE 21 TFP has been consistent (and slow)
0.5 1 1.5 2 2.5 3 3.5
Source: Fernald (2014a). Quarterly; samples end in Q4 of years shown except 1973 (end Q1) and 2016 (end Q2). Capital deepening is contribution of capital relative to quality-adjusted hours. Total factor productivity measured as a residual.
Business sector, percent change, annual rate
Contributions to growth in U.S. output per hour
Percent
TFP
Capital deepening Labor quality 1947-73 1973-95 1995-04 2004-07 '07-10 '10-16
SLIDE 22 Capital: Unwinding of dynamics of Great Recession
80 85 90 95 100 105 110 970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Pre-Crisis Projection
SLIDE 23
Low growth is the new normal
SLIDE 24
- Demographics: Slow hours growth
– Gagnon et al (2016): 1-1/4 percent slowdown since 1980
- If GDP per hour like 1973-95: GDP growth around 1¾ %
- Likely optimistic: Plateau in educational attainment means
less growth in labor quality (Goldin-Katz, 2009; Jorgenson)
– Bosler, Daly, Fernald, Hobijn (2016): Around ¼ pp less growth from that source, implying GDP growth around 1½ %
Demographics: Low growth the new normal
SLIDE 25
- Paper finds that growth in recovery exceeded (slow) potential
- Since 2007, TFP growth at its “typical” pace of past 40 years,
plus demographics, can explain disappointing GDP growth
- May have to accept the new reality
Takeaway: Was the Great Recovery really ‘Elusive’?
SLIDE 26
