Although unemployment has been falling for two years now, it is at a much slower rate than the customary post-recession declines observed to date. Having peaked at 7.9% in February 2014, the unemployment rate has so far come down only 1.4 percentage points. After the last time the unemployment rate hit this level, in 1995, it declined by 2.3 percentage points over the same period. It also fell at a quicker pace after the 2005 peak. The slower decline is not a reflection of a larger supply of job seekers. A comparison with previous economic upswings reveals that the labour supply is actually growing at a somewhat slower rate. Labour demand is a much more important factor. Employment is growing relatively slowly in the current recovery phase.
The table below summarises the differences between the current and the previous three periods of cyclical expansion. Unemployment fell 0.8 percentage points per year on average in previous recovery periods, compared to only 0.2 percentage points per year in the most recent period (row 1). Both labour supply (row 2) and labour demand (row 3) are growing more slowly than before.
Labour market three years after an unemployment peak
|previous recovery periods||current recovery period|
|change in unemployment (*)||-0.8||-0.2|
|labour supply (**)||1.3||0.4|
|labour demand (**)||2.1||0.6|
(*) Average annual percentage point change
(**) Average year-on-year percentage growth
The relationship between unemployment and economic growth: Okun’s law
The slow decline in unemployment is linked to a relatively slow recovery of economic growth. Whereas growth in gross domestic product (GDP) averaged 3.3% in the previous three recovery periods, it currently amounts to a mere 1.9% (measured over three recovery years). The quantitative relationship between economic growth and falling unemployment is known as Okun’s law. This is not a law in the literal sense, but rather an empirical rule of thumb that proves applicable in many countries and time periods. The relationship between the change in unemployment (y-axis) and GDP growth (x-axis) is also evident in the Netherlands for the 1984-2017 period. In the figure below, the straight line reflects the estimated relationship.