“Eureka”!

Laurence Ball et al did a guest post at Econbrowser on “The myth of jobless recoveries”.

They talk a lot about Okun´s Law and how it still holds. But the clincher is:

Why have the last three recoveries been viewed as jobless, while previous recoveries were not? This is because the speed of recoveries has been slower than before. In the early 1990s and early 2000s, as well as after the Great Recession, slow growth meant that sizable output gaps persisted well into the recovery. In contrast, in most earlier recessions, the output trough was followed by a period of above-normal growth that pulled output back to its previous trend. As Okun’s Law predicts, unemployment also returned to normal, making the recoveries look job-full.

Chart 4 illustrates this point with data for the early 1980s. After the recession of 1981-82, output growth averaged nearly 6 percent over 1983-84, with the result that output, employment, and unemployment were all close to their previous trends by 1984. Based on experiences like this one, observers came to expect that the end of a recession would lead quickly to a full recovery of employment. They were surprised when this did not happen more recently, even though Okun’s Law has not changed.

Ball-Okun_1

A little over one year ago I called it “The hole theory of employment” and illustrated with these two charts.

Ball-Okun_2

 

Ball-Okun_3

Note that I tackle the question from the perspective of Market Monetarist´s NGDP targeting, not from the vantage point of real output growth, since nominal spending is strongly influenced by monetary policy.

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