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News from EPI Unemployment rising too fast, then falling too fast …

For Immediate Release: Thursday, April 5, 2012
Phoebe Silag or Karen Conner, 202-775-8810

From Working Economics, the EPI blog:

Unemployment rising too fast, then falling too fast … going forward, it should (unfortunately) be just right

by EPI economist Josh Bivens

Has the unemployment rate fallen “too fast” given underlying output growth over the past 18 months? Applying a simple Okun-type relationship between changes in unemployment and the difference between growth rates of actual and potential GDP (or, changes in the output gap) would indicate so. Between the fourth quarter of 2009 and fourth quarter of 2011, the output gap shrank by less than 0.8 percent per year – which historically would only have been associated with a 0.4 percentage-point decline in the unemployment rate. Instead, the unemployment rate fell by 1.2 percentage points – or three times as much as our Okun regression might suggest should’ve happened.

Federal Reserve Chairman Ben Bernanke noted this “too low” unemployment last week (so have Tim Duy and others). While there’s definitely some interesting stuff to examine here, we should first point out the one thing that nobody disagrees about. Going forward from now, the best estimate for what another 24 months of 0.8 percent average output gap reduction will buy us is the one provided by the classic Okun-style relationship: A very slight fall – about 0.4 percentage points – in the unemployment rate. READ FULL BLOG