The Gross Domestic Product (GDP)
Gap: $1.1 trillion Real GDP; $1.6 trillion Nominal GDP
This article in our series on
macroeconomic measurements speaks to the GDP gap in terms of our inability to
rebound completely from the recession (December 2007 – June 2009) and linkage
with the subsequent shortfall in employment
Revisiting the Employment Gap
our last related newsletter article, we cited a shortfall of 8.4 million jobs
relating to the fall-off in the Labor Force Participation Rate, moving from 66.0%
in 2008, to 62.7% in 2015. The labor
force participation rate is the labor force (employed + unemployed actively
seeking employment) divided by the Civilian Noninstitutional Population (16+
years of age, not in the military, incarcerated, or otherwise counted in
2015 (Annual numbers in thousands (000)) at
66.0% Labor Force Participation Rate
Noninstitutional Population 250,801
Labor Force Participation Rate = 66.0%
Labor Force = (250,801 X 66.0%)
Labor Force = 165,529
Adjusted Labor Force 165,529 = [(Employed
148,834) + (Unemployed 8,296 + Adjusted Unemployed of 8,399)
this would equate to an additional 8.4 million unemployed, doubling the
unemployment rate to 10%. That 8.4
million missing from the labor force is what we refer to as the employment
one thing to point out the shortfall in employment picture, but it’s clear that
increased hiring only occurs when there is economic growth to justify it.
Gross Domestic Product (GDP) Gap
what occurs following an economic downturn is that the real GDP returns to
roughly the same trend line fairly quickly.
This was clearly NOT the case following the last recession dating from December
2007 – June 2009, according to the NBER http://www.nber.org/cycles/cyclesmain.html).
the economy had not fallen into recession, and had grown at a modest 2% real
GDP rate from 2008 and onward, this would have resulted in a fairly ‘normal’
trend line and the 2015 real GDP would be around $1.1 trillion higher than the
actual level ($16.3 trillion actual versus $17.4 trillion projected).
reality, the only way to get back to the previously mentioned trend line, would
be for the economy to grow at a higher rate than 2% - 2.5% for a period of
time. In the following scenario, we
inserted a growth rate of 5.6% annually for the years 2010 and 2011 with the
actual growth rates for 2012 through 2015.
The idea here is to illustrate how important it is for the economy to
grow at high enough rates to rebound from a recession.
Connecting the dots between the
Employment Gap and the GDP Gap
the connection between economic growth and employment is a fairly easy concept
to grasp, but there is a logical path to follow.
first step in the process is to get a sense where nominal GDP (at market
prices, or dollars in your pocket) would be at adjusting for a rebounding
economy. The reason we now turn to
nominal GDP is that when income, taxes, etc. are tabulated this takes place
with nominal dollars.
clear that the shortfall in GDP and National Income point to a less than
desirable level of employment. Simply
put, the driver of (payroll) tax revenue including income tax, Social Security
and Medicare is jobs. This is all very
straightforward, but what has been missing in the dialog is the failure to
recognize how much the employment gap, as illustrated by the lower labor force
participation rate since 2008 highlights the reduced trajectory of the nation’s
economic growth. Of course the lower
economic growth, or GDP, translating into lower national income and wages,
results in fewer payroll taxes being collected.
The tax shortfall also equates with increased budgetary deficits adding
to the debt.
short, the tie-in between the Employment Gap and the GDP/National Income
Gap/Salary and Wage Gap, is that if the economy had rebounded to its previous
trajectory, the labor force participation rate would most likely have recovered
to something closer to pre-recession levels.
As an aside, the added income would have brought significant revenues in
terms of current receipts (taxes and contributions to social security and the
Wrap-up: the Gaps have had a Waterfall
than ideal economic growth, as illustrated by the fact that the GDP has failed
to return to its pre-recession trajectory, resulted in at least a trillion
dollar shortfall in 2015 alone. In
addition, since the economy didn’t rebound to its pre-recession levels, the cumulative effect (total shortfall from
2008-2015) probably amounts to a $5 trillion to $6 trillion shortfall in real
GDP, with the nominal GDP shortfall closer to $10 trillion. Of course the waterfall effect is associated
with the reduced labor force participation and the resultant sub-par employment
numbers which translate into less tax revenue to support budgetary
the problems springing forth from the lack of sufficient economic growth has
lead to increased budgetary deficits on the fiscal side as well as a monetary
policy highlighted by several years of zero or near-zero Federal Funds rates.
up on macroeconomic measures: Price