Number: RS21139
Title: Unemployment and Economic Growth
Authors: Brian W. Cashell, Government and Finance Division 
Abstract: Economic growth and the unemployment rate are very closely related. The connection is such a stable one that it is often referred to as "Okun's law," after an economist who pointed it out. In the long run, economic growth is a function of increases in labor and in productivity. For economic growth to accommodate growth in the labor force without leading to a rise in the unemployment rate, it must at least equal the combined growth rates of labor and productivity. Over the last 50 years, the rate of economic growth required to keep the unemployment rate from rising has been, on average, close to 3,5 percent. Over relatively shorter periods of time, the rate may have fluctuated due to shifts in either labor force or productivity growth. Although labor force growth has slowed over time, the trend rate of productivity growth may have accelerated in the second half of the 1990s. Recent estimates put the combined rate of growth of labor and productivity at about 3.5 percent. If that is true, that is the rate that would be consistent with a stable unemployment rate. Economic growth below that rate would lead to a rising unemployment rate, and economic growth above that rate would likely lead to a falling rate of unemployment.
Pages: 5
Date: Updated February 5, 2002