Janet Yellen Discovers Okun's Law Is Broken, Confused Record Russell 2000 Doesn't Lead To Plunging Unemployment

Tyler Durden's picture

Moments ago Fed vice-chair Janet Yellen released a speech titled: "A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response." In it, Yellen finally revealed she is on the path to realizing the it is none other than the Fed's own actions that have broken the economic "virtuous cycle", and that Okun's Law - the bedrock behind the Fed's flawed philosophy of assuming more debt -> more GDP -> more jobs, is no longer relevant in the broken "New Normal." In other words, Yellen finally starts to grasp what Zero Hedge readers knew a year ago, when they read, "JP Morgan Finds Obama, And US Central Planning, Has Broken The Economic "Virtuous Cycle."

Some excerpts:

The unemployment rate now stands at 7.9 percent. To put this number in perspective, while that's a big improvement from the 10 percent reached in late 2009, it is now higher than unemployment ever got in the 24 years before the Great Recession.

This is misleading, as the unemployment rate now would be the same or higher than it was in 2009, if the labor force participation rate had been constant.


the government's current estimate of 12 million unemployed doesn't include 800,000 discouraged workers who say they have given up looking for work. And 8 million people, or 5.6 percent of the workforce, say they are working part time even though they would prefer a full-time job. A broader measure of underemployment that includes these and other potential workers stands at 14.4 percent.

In other words, the Fed is just about 2 years behind Zero Hedge, which penned in December 2010: "Charting America's Transformation To A Part-Time Worker Society, Following 6 Straight Months Of Full Time Job Declines." But better late then never.

As for the piece de resistance:

The greater amount of permanent job loss seen in the recent recession also suggests that there might have been an increase in the degree of mismatch between the skills possessed by the unemployed and those demanded by employers. This possibility and the unprecedented level and persistence of long-term unemployment in this recovery have prompted some to ask whether a significant share of unemployment since the recession is due to structural problems in labor markets and not simply a cyclical shortfall in aggregate demand. This question is important for anyone committed to the goal of maximum employment, because it implicitly asks whether the best we can hope for, even in a healthy economy, is an unemployment rate significantly higher than what has been achieved in the past.... If the current, elevated rate of unemployment is largely cyclical, then the straightforward solution is to take action to raise aggregate demand. If unemployment is instead substantially structural, some worry that attempts to raise aggregate demand will have little effect on unemployment and serve only to stoke inflation.

Sadly, it appears that the Fed is still at best two years behind on its Zero Hedge reading. Because if they had paid attention to economic data just a few days ago, when the BLS itself revealed that unit labor costs soared in Q4 by a blistering 4.5%, all those screaming about "economic slack" in the economy would have suddenly shut up, as this implies there is far, far less slack than previously suggested, and in fact, there is no slack at the current unemployment rate of mid 7%. It also explicitly confirms that the unemployment situation is indeed structural. Which is terrifying news for the US, because the old Fed normal of a 5% unemployment will never again be reached, and as a result the Fed will continue monetizing MBS and TSYs at a pace of $85 billion per month in perpetuity, leading to no unemployment gains once the structural barrier is hit, and converting all the excess liquidity into inflation. It also means QE4EVA for a long, long, long time.

But the worst news, is that once more the Fed is completely oblivious that it itself is the reason for the fact that the "virtuous cycle" is now impossible, as it is the Fed who has made an artificial construct of the entire economy, which like the market, and the record Russell 2000 have no idea how to even operate unless the Fed injects some $1 trillion into risk assets via the Primary Dealers each year.

And just to help our friends at the Fed along, here is our, and JP Morgan's, explanation how the Fed itself was instrumental in breaking the economy, from March of last year.

JP Morgan Finds Obama, And US Central Planning, Has Broken The Economic "Virtuous Cycle"

In the last few months we have presented various analyses, both ours and those of Goldman and even Jon Hilsenrath, on why one of the core economic empirical relationships: Okun's law, is now broken. Subsequently we presented another parallel line of inquiry - namely that in order to preserve the illusion of a recovery, the Obama administration (with help from the Fed) has engaged in a quality-for-quantity job transfer, where America is creating increasingly more jobs of lower quality (the bulk of which are part-time), which in turn is leading to less proportional personal income tax revenues, and thus to a secular shift in an indicator which is even more important for US economic growth than simply the number of jobs "gained" each month - labor productivity. Today, JPM's Michael Feroli ties these two perspectives together in an analysis that has extremely damning implications for the US, and global, economic growth prospects. In a nutshell, Feroli finds that "Productivity, which used to be procyclical, has now turned countercyclical" which in turn means that "if labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies" or said somewhat simpler: "the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist." Still confused: central planning, and the Obama vote grab has killed the "virtuous cycle"... Which in turn means that everything America is trying to accomplish is now a lost cause, as every incremental dollar spent, whether by fiscal and monetary policy, is pursuing an outcome that is now theoretically and practically impossible to achieve!

Congratulations central planning - you have just blown your own head off in the latest epic Catch 22. Because this time is never different. 

Feroli lays out the Okun problem quite simply:

Not too long ago Okun’s Law was somewhat obscure, familiar mostly only to economists. Recently, however, given the big move down in the unemployment rate, this empirical relationship has earned wider interest among financial and public policy audiences. The decline in the unemployment rate experienced over the past year is in apparent violation of Okun’s Law, which links changes in the unemployment rate to changes in GDP. What is curious is that two years ago Okun’s Law presented a similar puzzle but with the opposite sign: the rise in the unemployment rate experienced in 2008 and 2009 was in excess of what would have been expected by Okun’s Law given the GDP growth shortfall.


Okun’s Law holds that to reduce the unemployment rate down by one percentage point over the course of a year then GDP growth should be about 2%-pts faster than its long-run trend growth. With most estimates of trend growth in the neighborhood of 2.5%, this implies that it takes growth of about 4.5% for a year to lower the unemployment rate by one percentage point. In the year ending in December, the unemployment rate fell by almost a percentage point, a period in which growth was only 1.6%— not only not significantly above trend, but not above trend at all. To understand this violation of Okun’s Law, we return to Okun’s original analysis of the issue.


One of the bedrock relations of macroeconomics, even more fundamental than Okun’s Law, is that aggregate GDP (which we label Y) can be represented as function of the amount of capital (K) and labor (L) used to produce output, along with the overall level of technical progress (A) made in using capital and labor. More specifically, the relation Y=A*K1/3*L2/3 seems to describe US production fairly well. This means that a 1% increase in labor input will raise GDP by 2/3%-pt. If the size of the labor force is constant then a 1%-pt drop in the unemployment rate should increase labor input used in aggregate production by 1/(1-u)%, where u is the unemployment rate. This implies that holding all else equal, a 1%-pt drop in the unemployment rate should increase GDP by about 1/(1-.083)*(2/3)=0.7%, a number well below the 2% boost implied by Okun’s Law. The apparent disparity is resolved by the fact that all else is usually not equal: declines in the unemployment rate tend to be correlated with (1) increases in the average workweek, (2) increases in labor force participation rates, and (3) increases in average labor productivity.

Feroli on the labor force participation rate wildcard - nothing but an optical scam to fool the general peasantry into believing that the unemployment rate is dropping, when in reality we are having a historical economic transformation of unprecedented proportions. And call it lost productivity, or a quality outflow of jobs, end result is the same:

The breakdown of correlation (2) has received the most attention recently: instead of increasing, the labor force participation rate has declined even as the unemployment rate has declined. However, Okun himself realized that the correlation of labor usage and productivity was historically the most important reason that the Okun coefficient was so large. The fact that this correlation has gone the “wrong” way over the past few years can explain both why  unemployment increased more than Okun’s Law would have predicted in 2008-2009 and why unemployment has come down so much recently. In fact, if the correlation between productivity growth and changes in the unemployment rate that prevailed between 1947 and 1984 held last year, then the decline in unemployment we have witnessed would have been accompanied by GDP growth of around 4.1%, and there would be little left to explain.


Output—GDP—equals productivity, or output per hour, times hours worked. As we noted above, growth in productivity, or correlation (3) listed above, has been weaker than what would have been expected given the decline in unemployment. However, the growth in hours worked has been only a little weaker than what would be expected. Although the labor force participation rate, correlation (2), is weaker than what one would have expected given the decline in unemployment, the average workweek, correlation (1), is stronger than what would have been expected. On net, hours worked have not behaved too abnormally given the decline in unemployment—productivity has.

A historic secular shift: productivity - a core component of GDP, is no longer procyclical.

For most of the postwar period productivity was significantly accelerating in booms and slowing in downturns. The most common explanation for this relates to labor market frictions that make labor a quasi-fixed factor of production. For example, if union contracts stipulate a certain level of employment, then in a downturn less output is spread over the same labor “overhead,” reducing productivity; the opposite happens in a boom.


A variety of micro- and macroeconomic evidence suggests that labor market frictions have declined in recent decades, which can be seen less formally in the rise of temp help employment, the decline of unionization, the rise of internet job search, etc. These factors have made labor more of a variable factor of production, rather than a quas-fixed factor of production that is adjusted only occasionally. This trend has likely led to the end of procyclical productivity. Moreover, this trend is not going away, and so we should not expect the old macroeconomic regularities to reassert themselves.

The conclusion is staggering - everything we know about the economic virtuous cycle is now irrelevant!

The new pattern of productivity growth—no longer cyclical with respect to output and countercyclical with respect to employment—has several important implications. For one, we may continue to see the unemployment rate drop more than Okun’s Law implies. Another implication is that the labor share is no longer countercyclical. This also means that profits will be less correlated with improvements in the labor market.


A final, somewhat technical, implication is that the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist. The idea that there could exist virtuous/vicious circles between real economic outcomes and confidence (or asset prices, effectively the same thing) was first formally advanced by David Cass and Carl Shell. They referred to these virtuous/vicious circles as “sunspot equilibria;” George Soros dubbed the property “reflexivity.” Subsequent applied macroeconomists appealed to the procyclicality of productivity as evidence of the type of increasing returns to production sufficient to generate confidence feedback loops. If labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies. While it is hard to say much definitively, it is interesting to observe that over the last two years the economy has been subject to large swings in investor sentiment and asset prices, and yet actual growth outcomes have been remarkably stable.

And there are those who wonder why we detest "central planned" attempts to attain a fake equilibrium more than anything. Luckily, now that the core driver of economic growth has failed just so a centrally planned administration can get 4 more years of "hope and change" it won't be much longer until the wheels finally and terminaly fall off the centrally panned bus tour.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
King_of_simpletons's picture

Yellen has always been the perma bull dim bulb of the Federal Reserve. I wonder many times, what she must have done in the past to be a member of the Feds. Something really yucky.

redpill's picture

She was Greenspan's fluffer during FOMC coffee breaks.

James_Cole's picture

Structural changes in the labour market over several decades (which both write-ups focus on) are far more complicated and far reaching than just the central planning aspects.

Sure, it's disappointing that the FED has used that as an excuse to go cheap money crazy but the bigger issue both pieces point to is the labour economy of the past no longer works to keep unemployment at acceptable historical levels (therefore the US economy is in danger) and the FED is powerless to change this.

When America dominated for several decades after WWII the illusion that the economic system worked well was easy to swallow but now that the curtain has been removed the illusion is over.

"It also explicitly confirms that the unemployment situation is indeed structural. Which is terrifying news for the US, because the old Fed normal of a 5% unemployment will never again be reached"

"evidence suggests that labor market frictions have declined in recent decades, which can be seen less formally in the rise of temp help employment, the decline of unionization, the rise of internet job search, etc. These factors have made labor more of a variable factor of production, rather than a quas-fixed factor of production that is adjusted only occasionally."

A Man without Qualities's picture

She's the Maxine Waters of the Federal Reserve.

daxtonbrown's picture

Maybe economic 'laws' break down when Gov spending hits 25% of GDP and spending on boondoggles like Solyndra pimps GDP at the expense of real productivity.

A Nanny Moose's picture

...greater permanent job loss....suggests that there might have been an increase in the degree of mismatch between the skills possessed by the unemployed and those demanded by employers.

Who was responible for their education? Government.

Canadian Dirtlump's picture

Coming from the right satanic lineage. Probably just successful enough in child sacrifice to get to the top.



Go Tribe's picture

Meanwhile, silver and gold getting hit. I guess the currency wars are officially over.

redpill's picture

When fiat gets backed into a corner it can lash out like a rabid dog from time to time.  But you know how Old Yeller ends...

Kaiser Sousa's picture

ah "Oh Yellen"...

i loved that movie...made me cry when i was a youngin'..

kind of like i would be cryin now if i hadn't accumulated all that shiny over the years...

speaking of reminiscing.....


bigbwana's picture

All you need is Love, baby. Louis Armstrong. And who created Love? Look into your heart and you will see God. 

davidsmith's picture

It also means QE4EVA for a long, long, long time.


It means $40 trillion of looting, and then the system collapses.  By the way, the same thing happened under Louis XVI, in case you know anything about French economic history.  It's called "circling the wagons."  Ultimately the circle collapses.

JustObserving's picture

Hey Janet, do we have to do your thinking for you?  The Fed has printed $3.6 trillion that is propping up the Russell 2000.  It has nothing to do with unemployment.

A fake stimulus to the markets will not improve the labor markets.

asteroids's picture

"The stock market is NOT the economy." This wisdom is known far and wide. Apparantly the bozos at the FED are discoveing it for themselves.

davidsmith's picture

By the way, Yellen and all these other criminals are starting to realize, "Oh, they could come after me and I have no immunity, once this thing collapses."

davidsmith's picture

Congratulations central planning 


Excuse me, this is not central planning.  This is good old fashioned fascist, corporatist criminal conspiracy looting.  Don't glamourize what is going on.

Catullus's picture

So the New Guess is that we're approaching full "employable" employment.

Newsflash: people laid off in last recession were dumped for a reason. And it's not because they were valuable contributors. It was chance for a lot of companies to let go of deadwood. Tough for a lot of people to accept, but absent an outright shutdown of operations and liquidation, that's generally how it goes. Not working for 99 weeks doesn't add much.

LongSoupLine's picture

Launch two fucking cannons facing each other...


One cannon loaded with Keynesian shit eater Krugman, the other with super fucking yenta bitch Yellen.  Let the fucking "bad economic weather" wash away the fucking mess.


Fuck you Yellen, fucking printing bank sucking whore.  Fuck off bitch.

Joe moneybags's picture

You're not often described as "happy go lucky", are you, Soup.

Karl von Bahnhof's picture

Engineers of the human souls.

We got this 25 years ago here. Didnt work.

madcows's picture

I noticed back in school that the "smartest" kids lacked the ability to understand simple things.  They could do differential equations in high school, but couldn't tie their shoes.  Apparently it takes a normal fool to understand that taking on more debt doesn't reduce the current debt.  God help us.  These are the brilliant fools leading the country.

lunaticfringe's picture

Losing 15% on SKK in Jan. alone.. I'm riding this baby right to the bottom. 

ziggy59's picture

Does this mean another disgusting rat is soon jumping ship?

WSP's picture

Actually, the irony is that the very actions the thug criminals at the Federal Reserve "say they believe" will improve things are actually making them much, much worse. Let me provide an example that NOBODY is talking about.

I know a lot of business people including myself who will not invest in any new businesses precisely "because" the criminals at the Federal Reserve are printing to pump public company stock prices. You see, by boosting the Russell 3000 companies and by extension all publicly traded companies, these companies in effect have a "blank check" to "print" their own money via their corrupt, criminal stock (e.g option grants and other derivative criminal print yourself money operations that executives use daily). The problem with this is small businesses that make up for the bulk of decent paying jobs cannot compete with companies that can "print" their own money. The criminal thug mobsters at the Federal Reserve do not understand that publicly traded companies are simply using the leverage provided by the crime syndicate to enrich themselves----they are not going to create jobs en masse----only private companies where the owners have a real stake in the game do that.  In other words, real capitalism, not the Marxist policies Amerika has embraced.

The sad irony is that the Federal Reserve actions actually discourage job creation. Now I assert this is by design because I believe the criminal thug mafia Central Banks want to destroy small business and middle America so that they can create a totalitarian state---and they are doing a GREAT JOB of it. If this is not the case, then they truly are the most incompetent people on the face of the planet, and anybody who doesn't understand this needs an education in economics 101----you CANNOT COMPETE against companies that have the power of the printing press----and without that competition----YOU HAVE NO JOBS. Again, I think that lesbian thug Janet understands this along with her criminal friends at all the central banks.


Quinvarius's picture

Well said.

Imagine how better off our car industry would be now if GM had gone into BK the way it should have.  All teh smaller comapnies that could have grown up to take its place.  But no.  We have to carry that POS company around on our backs like a dead gorilla.

WSP's picture

Quinvarius, that is an excellent example----the innovation, risk taking, etc. would have been OFF THE CHARTS.   The fact is most "booms" we have had were always the result of the little guy being willing to step out and take a risk----he often lost----but he could ACCEPT THAT because he BELIEVED HE HAD A CHANCE.  The fact is the criminal thug central bankers at the Federal Reserve have destroyed our economy with their Marxist/Communist central planning, and short of people who do not have a pot to piss in borrowing money to sell hot dogs on the street, very few people in their right mind are willing to risk everything when they know the game is rigged against them by criminals who want them to be feudal serfs. 

In the end, let's not forget that the criminal administration in power also wants to see small business destroyed, because they typically do not vote for centrally planned, marxist/communist controlled economies, but rather, believe in personal responsibility and the old "American" way of innovation, risk taking, etc.  It is much easier to use the "Chicago" way on unionized, big business than it is on small business.  To me, that was the death kneel, and I will say that I saw this being "setup" during the Clinton years----this was all planned and quite frankly the destruction of our economy has gone much faster than even the criminals that planned it could have hoped for.  So sad---the greatest economy in the world DELIBERATELY destroyed by communists.

Karl von Bahnhof's picture

Look guys, its sad but there is not any other chance.

1) If they dont print.... Imperium goes to hell because all the drastic unpopular bankruptcies and lost prestige will totally reshuffle all political constructions from recent past and this is nono for them as they invested too much.

2) therefore they will print and buy everything in near universe and maintain control ( for some time)

3) hoping they will get time and find yet another external infusion (lybia, mali, syria, iran?)

4) who is the loser?

Hope we will hang them. 2014

Quinvarius's picture

The printfest has only just begun!  I can smell the money like I can smell those counterfeit Chinese Dockers I bought on Amazon that are made of rancid horse leather!

gould's fisker's picture

If it's Chinese then it's dog leather--no part of a horse gets out of there alive, or dead.

Kayman's picture

Sorry to tell you guys, but it's the skin of Chinese political prisoners.  Soon coming to America.

gould's fisker's picture

Get linked board game and some crayons for next Fed meeting.  Fucking bozo clown asshats.  Or perhaps they could explain to us what if anything members understand about economics or economies.


kito's picture

obama was just the nail in the coffin, the whole "virtuous cycle" was on its way to the end game long ago............as we all know, this country has massive structural problems that goes beyond any cycle that pundits insist occurs.......like the deer population on a well maintained lease, the u.s. population grew out of proportion to any real organic economic growth...............once the deer on the lease lose their supplemental feeding, the population reverts to balance with the land...................unfortunately its the same with the united states...........the u.s. population grew fat on credit and debt based employment thats not coming back....and now that the manufacturing and retail jobs continue to be increasingly automated away, the labor pool will continue to shrink...which leaves more and more on welfare, food stamps, medicaid, section 8...which puts the country further into debt in attempt to pay for it.....no sireeee, there is no virtuous cycle folks, only the steady decay and decline until some breaking point...................short of some miraculous energy/technological breakthrough, there simply wont be enough grass in the lease for all americans........

Cosimo de Medici's picture

Are we on the verge of a Reverse Currency War, where each nation wants the strongest currency?

Weidmann and Yellen (of all people) seem to be signaling a new way of thinking.  Incipient, yes, but it bears watching.

Tyler Durden's picture

Weidmann only wants a stronger EUR, because while it hurts Germany, it hurts everyone else in Europe much more, and especially France much more, i.e. a classic mercantilist beggar they internally rebalancing neighbor. This in turn leads to a proportional benefit for the core of the German economy as explained yesterday, and as shown best in this chart:

And when Yellen says not to expect rates to rise, it means the Fed will never stop monetizing the 30 year. How anyone can read that as wanting a strong currency is truly mysterious.

OpenThePodBayDoorHAL's picture

Yet again Germany versus France, exactly what they said they said they wanted to avoid when they created the euro. I'd like to know what Helmut Kohl and Mitterand were really thinking and plotting. DeGaulle knew the dollar bloc had to be resisted somehow, and maybe Mitterand had no other hand to play, best of a bad situation for a has-been nation. Fuck imagine if we still had the franc and the peseta and the lira and the deutschemark and the drachma, how much better off everybody would be

augustus caesar's picture

They're building up to the monetary equivalent of reliving the Franco-Prussian war of 1870. We all know how that one ended.


C'est la vie

bnbdnb's picture

Why the hell would the Fed think people with 401k's will feel wealthier, so they'll spend?

Ever tried getting your 401k money out?

Its trapped.

DavidC's picture

Janet Yellen, fuckwit.

Forgive my language but this is a term I'm finding comfortable to use for more and more of these educated idiots.


WSP's picture

David, I don't think they are "Educated" idiots (aka intellectuals)---I think they are DELIBERATELY DESTROYING America so that they can create a marxist/communist totalitarian state.  Make no mistake, the results you are seeing have been planned for many years, and when you go back and look at specific actions (e.g. the Clinton years with Robert Rubin deregulating), then the deliberate housing bubbles, etc., it is clear this is all a big setup to collapse capitalism and roll in a totalitarian state.

While I think people like Janet Yellon are disguisting criminal thugs who should be tried for treason, make no mistake----the actions you see are not due to incompetence----it is deliberate destruction of capitalism.  these thugs honestly believe that their form of communism will be better than all of the others that failed.  Oh, and they have no problem with using mass murder to achieve their goals----that is why they have been stocking up on "homeland" resources including the use of drones, etc.    They will blame it on mistakes, etc., but the destruction you are seeing is deliberate.

Charles Nelson Reilly's picture

I wonder if Yellen and Big Sis' have shared a 14" double dildo... paid for by the taxpayers of course?

Colonel Klink's picture

I think big sis has gobbled all 14" herself.  What a traitorous bull dyke she is.

PUD's picture


nobusiness's picture

Is it really this complicated? 

Massive debt (federal, State and Local, credit card, student loan) eventually makes people nervous.  The overwelming majority know that they are living above their means and that the game would have been over had it not been for the fed lowering rates below market.

This is causing employers to "try" to pay down debt (less hiring)

It will eventually cause consumers to "try" to spend less

that's it.  the end game is near.  Look at Greece the underground economy is flurishing because not paying taxes is like a 30% raise and keeps the end game off for a few more years.

there is a massive US underground economy.  everyone knows someone who is paid "cash" or "off the books"

Joe moneybags's picture

For those (lucky ones) who have not clicked on the link to Yellen's full speech, please don't waste your time looking for her "conversion" or epiphany that the Fed's policies might not be working.  She concludes that they are, albeit slowly.  The speech is one lengthy list of old and lame excuses as to why it's taking so long.

khakuda's picture

She's a fool.  She says the problem is one of the lack of demand, so they must get people to take on more debt and spend.  Taking on debt in decades past pulled demand forward.  When things slowed, her idiotic conclusion is to push rates negative and destroy the currency to force people to buy stuff they can't afford and don't need.

With incompents like her running the show, we're doomed.

NidStyles's picture

Okun's Law? I didn't know that it was an economic law now.