Some folks think that it’s a mystery that GDP has been so weak and that the unemployment rate remains low – but I’m not so sure.
If you look at the Okun relationship (change in Unemployment rate v. change in GDP), the labour market outcomes over the prior year are actually a little weaker than you might have expected.
One might object that this sample includes the still-curious breakdown in the relationship in the mid-naughties. That’s a fair point.
Averaging over the post 90s period, it looks like 3% is enough to hold the unemployment rate down – and given that, our labour market performance is bang on what you’d expect.
My assessment is that potential growth may be more like 2.75%. If this is the case there is little scope to ease monetary policy at present, and more of the fiscal deficit is structural than it seems.