# What economic growth rate is required to halve U.S. unemployment?

I've just completed a consulting project in South Africa looking at various economic inputs required to reduce their 25-35% level of unemployment. It is estimated that for every 1% of new jobs created, the South African economy must grow by 2.3%.

With a government target of 5 million additional jobs, over the current growth-rate, to be created over the next 10 years, the South African economy must grow at an average of 7.2% per annum for a decade.

I was wondering if anyone has done a similar calculation on what economic growth rate would be required to reduce US unemployment by half from the current 9-10%?

UPDATE: Fennec raises the point that a time-frame would be useful. Americans would probably want to halve unemployment in one year. So let's set this as, what economic growth rate would be required to halve US unemployment by December 2011, or December 2012?

• This is a bit controversial, but some economists think that unemployment needs to remain above a hypothetical number referred to as NAIRU (Non-accelerating inflation rate of unemployment) to be healthy. Even the proponents don't claim to know what the number actually is, but the best guesstimates are around 5.0-5.5%. – JohnFx Dec 12 '10 at 18:43
• Sure, and halving US unemployment would bring it back into that range... – Turukawa Dec 12 '10 at 22:48
• If you like this question, you should express interest in the Economics stackexchange. It's not really a personal finance question, and separating them out might be better. – poolie Dec 14 '10 at 0:43
• I have already, actually, just waiting for it to go live ;) – Turukawa Jan 5 '11 at 14:42
• @poolie: Economics stackexchange is closed! IMHO i think this question is an excellent fit here now. Discuss this here: meta.money.stackexchange.com/questions/528/… – Marco Demaio Jun 21 '12 at 13:22

Two points.

• Any job creation in excess of the number of new entrants into the labor force will eventually halve unemployment. That's math. You need to put a timeframe on it or the question is nearly meaningless.
• Economic growth isn't always expressed in terms of job creation. It can also come about from productivity improvements, or the deployment of capital. The installation of a pancake-stacking robot creates economic growth but does not necessarily create new jobs (at least not directly).
• Well, economic growth rates are usually expressed in annual terms which is what I meant. And economic growth isn't linear with job creation (hence the 1:2.3 rate in SA, which is down from the 1:1.8 rate a few years ago). So, yes, you're right this varies with time and that this ratio will change depending on the degree of innovation. However, assuming no major pancake-stacking robot equivalents start to arbitrage the labour-force, what sort of growth rate is required to halve US unemployment? – Turukawa Dec 12 '10 at 22:50
• You missed my point entirely. Things like a "growth rate" affect the economy and employment gradually over time. Exactly when do you want the US unemployment to be halved? Tomorrow, or the year 2525? – user296 Dec 16 '10 at 17:57

I believe the Bureau of Labor Statistics has published some numbers in this area... I cannot find them at the moment though.

I think you need to take these numbers with a grain of salt, though, because they cannot account for productivity and automation improvements that are being aggressively implemented. Companies aren't just bloodletting -- they are refactoring business processes and automating thousands of jobs away.

• Oh, sure, there's always "play" in the numbers, but having some sense of scale is very useful in order to contextualise whether a stated economic intervention has any potential for success. – Turukawa Dec 12 '10 at 11:35

I'm reminded of Say's Law (developed by Jean-Baptiste Say) which can best be reduced to: The market clears (i.e. there is always some price at which an item will sell in a market). Full employment can always be obtained in any free market economy. People may not be pleased, however, with their wage rate.

There are, however, many deterrents to employment (at least in the US):

1. Unemployment insurance
2. Minimum wage laws
3. Income taxes
4. Payroll taxes
5. Labor laws
6. Labor union laws
7. Civil rights laws
8. Health insurance and family leave requirements for employers
9. Food stamps
10. Government housing
11. Government medical care

These are just some I can think of off the top of my head. I'm sure there are many others.

• Unemployment expresses that there are some people who, if an adequate job offer was made (considering location, skills, wages, conditions), would take it. You can perfectly well have a market that clears at a price where not all potential vendors are in fact selling, nor are all potential purchasers buying. – poolie Dec 14 '10 at 0:55
• This is way too blithe. Labor-market flexibility reforms may well reduce unemployment, but they're not guaranteed to give you full employment. (Unless you make it true by definition.) Thought experiment: how many zero-skilled unreliable otherwise-unemployable people would you hire even if you could get them for a dollar a week? – poolie Dec 14 '10 at 1:13
• @poolie - "You can perfectly well have a market that clears at a price where not all potential vendors are in fact selling, nor are all potential purchasers buying." If vendors are not selling and purchases are not buying at a price then that is not really clearing the market. – Muro Dec 14 '10 at 3:30
• @poolie - "Thought experiment: how many zero-skilled unreliable otherwise-unemployable people would you hire even if you could get them for a dollar a week?" At one point I had zero skills and was a reliability risk since I had no employment history. Someone hired me. It took me a while to find a job. I'm sure it would have been much easier if there had been no minimum wage law. – Muro Dec 14 '10 at 3:35
• People who really want to work (or to hire low- price workers) can often get around minimum-wage laws in various ways: undocumented work, engaging as subcontractors, mandatory unpaid overtime, etc. Empirical evidence on whether minimum wages actually increase unemployment is quite mixed or ambiguous. I do agree they may have a marginal effect. I disagree that a totally unregulated labor market would totally eliminate unemployment; a lot of research and theory shows there are other causes. – poolie Dec 14 '10 at 4:40