New Estimates of the U.S. Economy's Potential Growth Rate

Abstract

Using an Okun's law framework, the analysis here estimates potential growth for the 1990s as measured by both fixed- and chain-weighted GDP. It then decomposes estimated potential growth rates into labor productivity growth (LPG) and labor input growth (LIG) using a regression analysis to separate secular from cyclical changes. It compares estimates of potential output and trend productivity growth for the 1990s with estimates from earlier periods. Results indicate that eliminating the substitution bias associated with fixed-weight measures of real GDP raises estimated potential GDP growth in the 1980s but lowers it in the 1990s. A slowdown in labor force growth, with little or no change in long-term productivity growth, largely accounts for the implied slowdown in potential growth. Copyright 1996 Western Economic Association International.

Are PIIGS so different? An empirical analysis of demand and supply shocks

“…This last value can be associated with the NAIRU concept, the natural rate of unemployment, or simply with the "Benchmark Unemployment Rate" (Lovell 2004). Originally, Okun (1962b) main purpose was to obtain a measure of potential output (Okun 1962a;George A. Kahn 1996). However, the results of his study became widely known as a "relation 3:1", which reflects the idea that the economy experiences a 1 percentage point increase in unemployment for every 3 percentage point decrease in GDP from its long-run level and vice versa.…”

“…The application of the mutatis mutandis principle raises problems of interdependency between variables that would certainly affect the stability of the relation. We now present some of these relationships which may affect the value of β: (1) relations between employment, labour force and unemployment in a dynamic context, characterising the supply and demand of labour (Christian E. Weber 1995; Leopold Sögner (You 1979;Martin Watts and William Mitchell 1991); (3) variations in productivity (Kahn 1996;David Altig, Terry Fitzgerald, and Peter Rupert 1997) and its cyclical fluctuations (Thor Hultgren 1960); (4) changes in human capital and in working time (You 1979;Farzad Farsio and Stacey Quade 2003); (5) cyclical evolution in the participation rate (Anthony Thirlwall 1969; Jimmie R. Monhollon and William E. Cullison 1970;Thirlwall and Norman John Ireland 1970); in gender composition (Martin Boďa and Mariana Považanová 2015) or age composition (Luca Zanin 2014); ( 6) labour hoarding phenomenon (Thirlwall and Ireland 1970;Sögner and Stiassny 2002); ( 7) different protection policies of employees (Roger T. Kaufman 1988;Weber 1995;Moosa 1997;Blanchard 1999;Sögner and Stiassny 2002;Nicholas Apergis and Anthony Rezitis 2003) which ultimately may be the result of increased international competition or the attempt to reduce the gap between insiders and outsiders in the labour market; (8) and evolution of unemployment rate hysteresis (Knut Roed 1999;Sögner and Stiassny 2002;Dany Lang and Christian de Peretti 2009). Another problem ( 9) concerns the behaviour of the OL on the business cycle.…”

“…While the use of dynamic modelling can solve some of mentioned above problems (Kahn 1996;Gordon 2010), it is quite difficult to solve all of them at once. When relevant interdependence is not explicitly considered, the serious problem of instability of estimates rises simply because there is no reason for a stable relation over time between the two variables.…”