Tuesday, March 5, 2013

What Does The Sequester Mean? Unemployment.

What does the sequester mean? In a word, unemployment.

By most estimates, the sequester will reduce 2013 GDP growth from what would be somewhere around 3% to somewhere around 2%. That might not sound so bad. After all, it's still growth, right? One might think that if one is not familiar with Okun's Law. We need some growth in the economy to deal with growth in population, productivity, and other factors.

How much growth do we need to break even? Around 2.7%.* That's roughly the rate of economic growth we need just to keep a steady rate of unemployment. When we're not already at full employment -- and we certainly aren't likely to see full employment in 2013 -- any growth rate higher than what's needed to break even will translate to a reduction in unemployment. And should we drop to a growth rate below that break even point, then expect bad things to happen to the unemployment rate.

Remember what the common estimates were for GDP growth without the sequester? 3%. That would mean that if it weren't for the sequester, then we could expect a slight drop in the unemployment rate over 2013 due to just enough jobs being added to see some improvement.

And then there's the sequester. With estimates of the sequester slashing growth down to 2%, that means for 2013 we're likely to be below the break even point in growth. Rising unemployment looms on the horizon.

* Estimates vary, among other reasons because the current steady-state figure can vary a bit with various conditions, but 2.7% is in the rough ballpark.

No comments:

Post a Comment