Repealing Okun’s Law

by | US Economic News

Whether or not your company has brought new employees on board recently, it’s worth noting that 2011 ended on a positive note on the jobs front, as U.S. payrolls added a net 200,000 positions in December alone. Even with seasonal adjustments and allowances made for holiday-related hirings, analysts were encouraged.

But there’s another interesting story lurking.

According to the U.S. Labor Department, productivity is up 25% since 1999, but that output is being churned out by with about the same number of workers as in 1999. So total employment sits at the same level as 13 years ago, but production is up by a quarter? Kind of blows Okun’s Law out of the water, doesn’t it?

In case you’re not a labor economist Okun’s Law (we admit, we Googled it) states that a 3% increase in output corresponds to a 1% decline in the rate of unemployment. There are other factors in play, or course, but Business Week notes that if the calculation held, today’s unemployment rate of almost 9% would be about 1%.

So what happened?

In part, technology. For instance, orders for software and equipment placed by U.S. firms were at record levels in the 3rd quarter of 2011. This has to be interpreted as good news for the longer-term economic picture. Generally speaking, you don’t improve your ability to fill orders if you’re expecting demand to drop for whatever it is you’re producing or providing.

That’s great…but are robots and computers getting all the good jobs?

Well, not really. If technology destroys some jobs, it necessarily creates others. After all, someone has to run the machines and computers. Businesses added more than 500,000 jobs in the U.S. since Labor Day, and a report released by a group of leading economists released in November indicates that most expect unemployment to stay under 9% through 2012.

Interestingly, two sectors that had been lagging in growth – manufacturing and mining – combined to give the biggest boost to the hiring numbers. Factory jobs increased by more than 225,000, the most since 1997. Payrolls in mining last year rose by 89,300, the most since 1981 and up 13 percent from 2010, with oil and gas extraction accounting for more than 25,000 positions.

But don’t break out the champagne quite yet. According to Kiplinger’s, the U.S. economy in general and labor market in particular still face some significant challenges. Overseas growth is slowing in Asia, and Europe is sliding into a recession. In the U.S., housing demand hasn’t rebounded as hoped, and revenue-strapped local governments continue to lay off workers. Gross domestic product is projected to grow only about 2.3% in 2012. A growth rate of about 4% is needed for a healthy recovery.

The first quarter of 2012 should be interesting to watch.

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