IB Economics IA Commentary. Title of Extract: Economys gains fail to lower jobless rate

"Don't forget how many people lost their jobs," said Tom Porcelli, an economist at RBC Capital Markets, in reference to the more than 7.3 million laid off during the worst recession since the Great Depression. "The unemployment rate is still going to remain high because of all the people out of work."

As of last month, more than 6.3 million people have been out of work for six months or more, making up nearly 42 percent of the unemployed. That is near a record high of 6.76 million set in May.

“And those out of work for long periods will find it particularly hard to get back to work”, Porcelli said.

Employers are less likely to hire the long-term unemployed, in part because many workers' skills deteriorate the longer they are out of work.

     Throughout the extract, focus is placed on America’s lagging job market compared to recent economic improvement.  Relative economic logic suggests that as an economy recovers, the unemployment rate (Unemployment Rate – “percentage of the labor force unemployed at any time.”) would consequentially improve.  However, as the extract implies, this process occurs at a delayed pace due to the severity of the latest economic downturn and the resulting massive layoffs that cannot be matched with current job creation.  

   Although the overall job market remains strained from recession, the extract notes the decline in initial claims for unemployment insurance down to 420,000 as “a significant improvement after hovering most of the year above 450,000”.  This, however, does not reflect openings in the work force, but rather that fewer workers are being laid off and the beginning of recovery to pre-recession jobless levels.  

   Therefore, the prevailing problem in America’s job market no longer lies with the layoff situation, but rather the reluctance of employers to rehire or create new jobs.  Without employers actively hiring, the unemployment rate will continue to increase as victims of frictional and structural unemployment (Frictional unemployment – “unemployed workers between jobs.”1; Structural unemployment - “changes over time in consumer demand and in technology.”1) are left occupationally stranded and add to the post-recession number of unemployed.

   Even though the economy began recovering due to optimistic predictions, the upturn in economic climate likely caused employers to invest in their businesses through, “ordering more computers and appliances,” rather than hiring additional workers.  Since more spending resulted from recovery, the economy saw an increase in gross domestic product (GDP), (GDP - “the total market value of all final goods and services produced annually.”1), but roughly no improvement in the unemployment rate.  

   This trend can be demonstrated in Figure 1 which, focusing on recession years , shows that after a recession, GDP continues to increase while the unemployment rate rises slowly and then begins to decrease after about two years.  So, with the past two recessions providing as historical example, this post-recession stagnation of the jobless rate appears typical to the American economy despite a resurgence of GDP.

   Still, with an excessive number of unemployed, the economy cannot operate to full potential on its production possibilities curve (PPC) ( - “a curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy.”1) and, thus, creates a gap in GDP (GDP gap - “the amount by which actual GDP falls short of potential GDP”1).  

   The connection between the unemployment rate and real GDP can be quantified from Okun’s law that states, “for every one percentage point by which the actual unemployment rate exceeds the natural rate, a GDP gap of about two percent occurs.”1 As Figure 22 demonstrates, with high unemployment, a positive gap exists (where potential GDP (GDPPOT) is higher than real GDP (GDPCA)), and with low unemployment, the gap narrows or becomes negative.  During the recession periods, the diagram shows the gaps positively widen and, due to the drastic climb in unemployment in the 2008-2009 Great Recession, real GDP began to fall, creating the widest gap shown.  

   Through analysis of the extract and diagrams, one can conclude that the United States displays a modernly unprecedented positive GDP gap which represents failure of the economy to fully employ all of its given resources.  Therefore, even though the economy has made gains in GDP, it is still not fully utilizing its entire labor force which causes the United States to function inside of its PPC.  Since the economy is not at full productivity, greater possible gains in GDP are irreversibly forgone, leaving weary employers responsible.