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How Can the Economy Be Growing While Unemployment Is Rising?

Name: Denise Lai
City & State: Berkely, Calif.

Question: Your work on the economy is discussed at our dinner table, with my 15 and 16 year old sons, almost every night. You have made such a difference to our family in understanding the Global Economic Meltdown.

My children are very distressed by one statistic, and I have no good explanation to offer them: "How can the economy be GROWING while unemployment is RISING?" I showed them your story on that, but they were unsatisfied.

"If this is a statistic we make up, Mom, why can't economists simply insert rising unemployment as a factor in their definition? We sure don't see the suffering get any better. If they define it at Harvard, then they can change the definition," says Joshua, age 16.

"This is just a government program to makes us all feel better about being miserable," Ross, age 15. Naive, I know.

I would appreciate your help in clarifying this subject for them. They really liked your NYC job fair interviews and the paintings you profiled of Ken Lewis and Dick Fuld. Still, I don't how to refute their assertion that we are being fed a steady diet of "happy pills". Thank you ever so much. --Denise Lai & Eylon Caspi (mom and dad), plus Joshua & Ross Lai (high school rebels)

Paul Solman: Thanks to all you Lai/Caspi's. The question is both rebellious and profound. Economic growth is measured by the total sales of all goods and services in the economy, with imports subtracted from exports (which reduces the number so long as we have a negative trade balance).

So, how could the total be going up if unemployment is TOO? Well, suppose there are ten of us on a tropical island. All ten work -- picking and cracking coconuts. Pretty soon, we get efficient enough so that 5 of us can do the work 10 used to do. Five stop working. But the five on the job get even MORE efficient, so three can take care of the coconuts, one of the workers starts fishing instead, and the fifth joins the ranks of the unemployed. The economy has grown -- same number of coconuts PLUS new fish means the economy is wealthier, right? -- but unemployment has grown, too.

In other words, PRODUCTIVITY (more output per worker) yields economic growth, not the necessarily the number of workers.

-- Posted October 20, 2009 | Comments (3) | Permalink