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Demystifying why US economic growth is lackluster

Abdullah A Dewan | Published: October 14, 2019 20:41:15


The US gross domestic product (GDP) grew at a rate of more than three (3.0) per cent for much of the 1980s and 1990s, according to the Bureau of Economic Analysis (BEA). However, the growth rate has slackened remarkably since the Great Recession of 2008. The September unemployment rate at 3.5 per cent is at a 50-year low while the economic growth is slated as anemic - it grew by a lacklustre annualised 2.1 per cent in the second quarter of 2019.

This slow growing economy has become worrisome since GDP growth drives wage increases, boosts living standard, and expands the size of the nation's economic pie - allowing more people to have a bigger slice.

Economists are divided in diagnosing as to why the economy is experiencing a sluggish growth with historically low unemployment rate and wondering - without a unified clue - if the good old days of faster growth are happy episodes of the bygone years.

The US economy has also been defying two other historically established laws or phenomena: (1) The inflation unemployment trade-off embodied in the Philips Curve paradigm; and (2) Okun's law which embodies that a one per cent increase in the cyclical unemployment rate is roughly associated with two per cent decrease in real GDP growth. These two recent nonconformities are addressed in a separate article. This piece lays the foundation to account for recent sluggish growth.

A country's GDP is measured by total numbers of labour hours multiplied by output produced per hour, that is, "labour hours × labour productivity". In this measurement labour productivity growth is almost everything in long run. For example, small differences in productivity growth rates compound, causing enormous difference to society's prosperity. It reduces poverty, increases leisure time, and enhances a country's ability to finance education, public health, environmental improvement, arts etc.

At the peak of the Great Recession, unemployment rate reached as high as 10.0 per cent in October 2009. That rate has steadily declined to 3.5 per cent in September 2019 as more and more people entered the labour force with the expansion of the economy. Obviously, more workers employed means everyone contributes more output and the country's economy grows. But even as the US economy keeps adding jobs, economic growth has not accelerated in commensurate with previous post-recessions pace - roaming around a dreary two (2.0) per cent or so. One of the factors attributable to the lacklustre growth is a noticeable slowing down of labour productivity growth.

The US non-farm business sector labour productivity increased by an annualised 2.3 per cent during the second quarter of 2019, following a 3.5 per cent gain in the previous quarter. Output grew 1.9 per cent while hours worked dropped 0.4 per cent - the biggest decline since the third quarter of 2009. Year-on-year, productivity went up 1.8 per cent, reflecting a 2.6 per cent rise in output and a 0.9 per cent increase in hours worked.

It may be noted that falling unemployment rate may not necessarily transform into accelerated hours of work and accelerated output growth. Why so? Let us examine how employment/unemployment are defined as they relate to US economy.

THE EMPLOYED: Everyone currently working full time (common standard is 40 hours per week) plus those working part time (less than 35 hours per week) voluntarily/involuntarily.

THE UNEMPLOYED: People not currently working - comprising of people (1) temporarily laid-off and are expected to return to work, (2) those actively looking for a job in last 4 consecutive weeks. If they stop looking for jobs after four weeks, they automatically drop out of the labour force and hence are not counted as unemployed.

DISGUISED UNEMPLOYMENT: Involuntary part-time worker, loss of overtime or shortened work hours

DISCOURAGED WORKER: Unemployed person who gives up looking for work - no longer counted as part of labour force.

In the US, full employment is attained when everyone who is willing and able to work can find a job. That does not necessarily mean unemployment can reach a zero level. Therefore, the economy operating at full employment still has some unemployment arising out of frictional and structural sources. It is worth noting that in the US there are three sources of unemployment (U) as follows:

U = Cyclical (CU) + Structural (SU) + Frictional (FU), where CU is associated with economic recession and expansion;

SU arises from job losses due to mismatch of skills as new high-tech machines are added to the production process and workers are displaced by automation;

FU is associated with normal turnover in the labour market. They include people effectively looking for jobs (some of whom voluntarily gave up their earlier job) - that is, they are in between jobs - not fired from jobs but looking for jobs (could be for better salary, better weather, unavoidable family reason etc.) and those changing occupations.

Identifying the sources and kinds of unemployment as presented are important for policymakers to devise policy tools to minimise the overall unemployment in the economy. For example, while CU can be influenced by expansionary monetary and fiscal policies, SU can be minimised over time as workers acquire job skills on their own or through government and business-initiated training and schooling.

However, the FU is an exception - which cannot be easily tackled. It may be noted that FU, as defined, is a unique feature of the US economy for its size where jobs are always available if the economy is not sliding into a recession.

In other developed/developing economies, FU is not completely absent but is rarely tracked or reported as not being important or properly understood. In a predominantly agricultural farm-based economy like Bangladesh, it is very difficult to estimate unemployment rate - let alone categorising the sources of unemployment.

Unemployment rate decreases as either full time workers or part time workers or both are added over time. A decreasing unemployment rate certainly means more people are employed. But the unemployment figure cannot be used to estimate GDP because the measure does not differentiate between full time and part time workers.

Therefore, measuring average product (output produced per worker, called labour productivity) will be erroneous. A correct and meaningful measure of GDP is, therefore, done by total number of hours worked× output produced per hour". And GDP growth rate = per cent change in labour hours + percentage change in labour productivity.

The part-time employment (working less than 35 hours per week, as of August 2019) as a percentage of total employment was approximately 17.1 per cent. The number peaked at 20.1 per cent in January 2010 since 1968 when it was first collected. Although, a higher percentage of part time workers in total employment would have some drag on the level of output produced, a 17.1 per cent is not large enough to contribute to a lacklustre economic growth given that GDP growth was 2.5 per cent when part time workers was at 20.1 per cent in January 2010. Therefore, we must look for others factors to account for US economy's lacklustre growth at this time when unemployment is at 50 years low.

Abdullah A Dewan, formerly a physicist and a nuclear engineer at BAEC, is professor of Economics at

Eastern Michigan University, USA.

adewan@emich.edu

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