Why is GDP Growth Higher than the Unemployment Rate?

The growth rate of gross domestic product was higher than the unemployment rate last quarter. GDP adjusted for inflation increased 4.2 percent. The unemployment rate averaged 3.9 percent during April, May and June. That hasn’t happened in a while.

The president said GDP growth was higher than the unemployment rate for the first time in a hundred years. He was mistaken. It last happened in the first quarter of 2006. But it is an increasingly unusual coincidence.

What are these numbers? The unemployment rate comes from a monthly survey by the Bureau of Labor Statistics, in the U.S. Department of Labor. It’s the number of unemployed people divided by the labor force, which is the sum of employed and unemployed people. It was 3.9 percent in August, down from 10 percent during the Great Recession.

Gross Domestic Product is the value of goods and services produced in the United States, measured by the Bureau of Economic Analysis in the U.S. Commerce Department It’s adjusted for inflation to get real GDP, and the percentage change in real GDP is the growth rate. Real GDP growth has averaged 2.3 percent per year since the recession. It was 4.2 percent in the second quarter.

We have quarterly real GDP growth rates since 1948. Over those 70 years, real GDP growth has averaged 3.2 percent. The unemployment rate has averaged 5.8 percent. Most of the time real GDP growth was lower. In 282 quarters, real growth topped the unemployment rate 64 times, including the second quarter of this year.

Growth exceeded unemployment 23 percent of the time. That’s almost once a year on average. That doesn’t seem so unusual.

But lately it is. In the 100 quarters from 1948 to 1972, real GDP growth exceeded the unemployment rate 42 times, which is 42 percent, of course. Between 1973 and 1995, real GDP growth was higher in 11 of 92 quarters, 12 percent. From 1996 to 2005, growth was higher in 9 quarters out of 40, which is 23 percent. Since 2006 it’s happened only twice, in 50 quarters. That’s 4 percent. Lately, it’s unusual.

When is the unemployment rate low and real GDP growth high? When the economy is at capacity, and the labor force and productivity are growing fast.

The unemployment rate is high when there are people, buildings and equipment that could be producing goods and services, but are not. When people want to buy more, businesses employ the people, open the buildings and rev up the equipment, and produce more products. Real GDP grows faster, but usually not so fast as to top that high unemployment rate.

When the unemployment rate is low, though, there aren’t many unemployed resources. Production grows because new workers enter the labor force, and new and better tools are available to use. Growth is limited by increases in the labor force and productivity. If the labor force and productivity are growing fast, growth can exceed that low unemployment rate.

From 1948 to 1972, productivity grew fast. It was the zenith of industrial America. After the mid-’60s the baby boomers started working, and that made the labor force grow fast, too. So, during that time, it was pretty common for real GDP growth to be higher than the unemployment rate.

Then productivity growth dropped off. Maybe it was the energy crisis, or high interest rates, or environmental regulation, or a whole lot of inexperienced workers. Between 1973 and 1995, growth rarely topped unemployment.

Productivity growth revived between 1996 and 2005. It was the information technology revolution. And sure enough, growth exceeded unemployment more often.

Productivity has lagged since 2006. The reasons aren’t clear, but we’re sure that baby boom retirement has cut labor force growth. Both trends mean that real GDP has grown more slowly at capacity. Hardly ever will growth be more than the unemployment rate.

But it happened in the second quarter. Maybe productivity has turned the corner, and real GDP will grow faster. Maybe it’s just a burst of production in response to spending from the tax cut.

Will we see more quarters with growth above unemployment? The BEA will announce third-quarter growth on Friday, October 26. Mark your calendars!