Where is Employment Headed?

Friday’s unemployment report of fewer jobs lost than expected surely beats the alternative, but that does not mean that the employment situation will improve significantly anytime soon. What it hopefully means is that things won’t get dramatically worse, although that certainly can’t be ruled out.

Calculated Risk, perhaps the most prolific chart maker and data analyst of all economics blogs, presents an analysis on the potential speed of the employment recovery. These estimates are based on Okun’s Law (an established relationship between GDP growth and job creation):

unemployment and GDP

In the 2010 budget, OMB projects real GDP growth of 3.5 percent from the fourth quarter of this year to next, meaning that, if Okun’s law were still operable, we’d be somewhere in the mid to high 9 percent unemployment range at the end of next year. (The Federal Reserve sees similar numbers.)

Having said that, many leading economists, including NDN’s Rob Shapiro and the Director of the National Economic Council Larry Summers, have argued that Okun’s law has broken down, making the relationship between GDP growth and employment weaker, which means these projections may be - sadly - optimistic.