Friday, November 4, 2011

GDP vs EMPLOYMENT...This is THE graph people FOR and AGAINST the OWS protesters need to see and think about...

In AP Macroeconomics we teach students there is a direct relationship between changes in Real GDP and Employment (or an inverse relationship between Real GDP and UN-employment). 

In the graph below this relationship holds nicely, whether Real GDP (Blue Line) is increasing or decreasing. Employment (RED Line) follows, albeit to different degrees but the relationship is relatively tight.  It makes sense: If in real terms, more goods and/or services are produced, more people will be hired. If fewer goods and/or services are produced, fewer people are needed.
Source: Carpe Diem

However, in the first/second quarter of 2009 this relationship breaks down. While Real GDP bottoms out, employment continues a free fall.  As Real GDP recovers and increases, employment STILL falls before leveling out.  We have a large GDP to employment deficit. 

Starting in the first quarter of 2010 notice the change in the slope of the Real GDP line relative to the slope of the employment line. The former becomes steeper and the latter relatively less steep.  Very different from previous years.  Real GDP is now at its pre-recession level BUT employment is at approx. 6.6 million FEWER workers. What a difference two years makes!

If, on a macro-level, businesses are producing and selling the same dollar amount of goods and/or services as they did before the recession and doing it with many fewer workers, it is relatively easy to see why corporate profits are at record levels. 

Can we chalk this up to "corporate greed"? Were these 6 million workers not really needed in the first place? Has technology and/or efficiencies/improved processes rendered many workers unnecessary? Are businesses working the remaining workers to death to wring as much profit out of them as possible? 

Corporate greed is not a new thing.  If this was the case, why did it not happen to this extent before?  Did corporations just recently figure out how to do more with less?  Below I extended the timeline of the above graph back to 1950.  The last time we had a significant separation between these Real GDP and Employment was back in the 1950's.  Why did the gap close for so many years/decades then reappear?  Are the two periods comparable in any way? Is there no connection?  Am I completely off the mark and comparing apples and oranges?   I honestly don't know and would love to hear any suggestions....

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