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.

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Kayman's picture

Tyler, save me looking it up. But isn't Okun's law silent on foreign trade; that it assumes a closed economy ?

Super Broccoli's picture

to increase agregate demand ???? WHY ? not like anything was produced in america anymore !!!

increasing agregate demand only leads to increasing debt and enriching chinese corporations !

khakuda's picture

So great that Yellin, one of the most inept, has the early lead on Chairmanship.

As you point out, their entire plan is based on the belief that printing money creates wealth/jobs and that high unemployment is cyclical, not structural.  If these are not true, and I believe they are not, all they have done is keep prices higher than they should be, thus slowing the economy.

I don't know about you, but increasingly, everything I buy is made in Asia.  That has been the case for a couple decades and becomes more so every year. Even the frozen fish from Costco was farmed in Vietnam.  Face it, Yellin, the US IS structurally losing jobs in a lot of industries.  Look around you.  Only an academic couldn't see it.

Get back to printing more money Janet, you know you can't resist.

Hedgetard55's picture

This skanky ho is a traitor and a radical Marxist.

Kaiser Sousa's picture

hey look ya'll...ur gov'ment got all kinds of money....



President Obama plans to propose a 1% pay hike for civilian federal workers in his budget proposal for 2014.

"The White House's Office of Management and Budget officials briefed federal labor leaders late Friday on the proposed pay hike. Federal pay has been frozen for more than two years. A 0.5% pay hike is scheduled to go to civilian federal workers in late March. That pay hike was delayed when President Obama extended the existing pay freeze a few months to give lawmakers time to come up with a budget deal.

Union leaders were elated to hear the news.  "After all that federal workers have sacrificed the past three years, they have earned a raise. I repeat, they have earned a raise," said William R. Dougan, president of the National Federation of Federal Employees."

JR's picture

“A deadly decision was made in late 1999 that assured the demise of the nation, questioned by few, never having sat well with those in possession of an active economic brain stem. The discharge of the bulk of US factories to Asia, mostly to China, sent the legitimate income producing capability away, only to be replaced to a deeper dependence upon asset inflation.” –Jim Willie

There are two words that signify everything; and the words are “jobless recovery.” The word “jobless” stands for the loss of manufacturing jobs and the wave of immigration, both Third World and high tech, displacing workers within America and holding down salaries.  The word “recovery” stands for the lie; the big lie that placates the public while their economy and their country are stolen by the international bankers.  

joego1's picture

The way I see it is the youth in this country have already been destroyed, at least the ones who don't join the governments march. Any visage of the middle class will be wiped out through inflation and outright government theft through taxes and anything left after they die will be collected as inheritance taxes. I honestly think I may be one of the last of a generation of free Americans. If we can consider ourselves free these days.

Venerability's picture

Dr. Yellen is almost certainly the next Fed chief.

Live with it!


hardcleareye's picture

And you are basing your conclusions on what.... the fact that Obama passed her over in 2009???

Shizzmoney's picture

I bet this woman is a nice person......a naive, "educated" woman who wants to make society better...........but this is what happens when you put people (The Federal Reserve) who haven't worked a day in their life, in an institution that tells people who to RUN their lives (unless you are in their inner circle), in charge of dissecting on how to make an economy better.

In a sense, she's just touting the company line, because to her superiors (aka, the MEN in the room), this "pheonomena" isn't a divergence against "the mean"...........this was THE IDEA ALL ALONG:

From my boy Dylan Ratigan:

The Fed Works... for Chinese Workers


What do I mean by a conspiracy? Well, you can read all about it. It's right in the transcripts of the December 2005 Federal Open Market Committee, which is the committee of central bankers that run America (more on that below). In that meeting, Dallas Fed President Richard Fisher is complaining about the enormous quantity of Chinese goods flowing into America. He points out that this is creating 'disinflation', i.e. lowering prices and wages for Americans.

Only, he isn't complaining that there are too many Chinese imports, he is frustrated there aren't enough imports. Even though China has built special export-only ports to ship goods out of China, he says, the ports at "Long Beach and Northwest" can't absorb what China wants to sell us, because of work rules (i.e. unions). This is a huge problem, Fisher continues, because it is blocking his CEO contacts from outsourcing as much work abroad as quickly as possible. They cannot "exploit China" fast enough.

You won't be surprised to hear that shipping American jobs overseas isn't a new strategy. It's been going on in earnest since the 1970s -- crushing inflation by crushing our wages. According to Bill Greider (who I recently interviewed on Radio Free Dylan), in the early 1980s, Paul Volcker would carry around a card of union wages, so he would know when labor "got the message and surrendered on its wage demands".

So the next time you are read a Richard Fisher "populist" quotes and wonder why he seems to be parading as the Fed's dissenter-in-chief when it comes to bailouts, printing money to buy up MBS, or even unemployment..........you can just go back here and look at this as the reason why (that way, when SHTF, we won't be taking our pitchforks to his farm where he hoards gold and silver).


Opinionated Ass's picture

Blame companies who want to trade with the Chinese, eh? I don't think so.

Do you really think people should be prevented from trading with whoever they want? Why not go all the way: force people to buy only from manufacturers in their own state? Hell, their own town! See how stupid going down the protectionist road is?

And no, I don't give a crap if other countries have import duties against our exports. Our import duties should always be zero. Put it this way: if you're in a rowboat with a nitwit who shoots a hole in his end of the boat, would you shoot a hole in your end to get even? Only if you're a protectionist nitwit yourself.

trendybull459's picture

Calculate money playing in ETFs,where its going,75% into pockets of banks creating it,some of ETFs impossible to detect who issued,all ponzi schemes by Berni Madoff at cry of how unfare he got compare to the FED and Politicians covering this mess,visit our new page and do not forget to vote on FED pool:


Michelle's picture

Okun's broken, so what's new?

Scientists are working real hard to replace the rest of our carcasses with AI, that should be a real picnic, never dreamed we would have to take orders from a machine but that's next in the long line of technological "innovation."

Downtoolong's picture

The only question now is, who will take the blame?


The Federal Reserve Bank is seeking a unique individual for a new middle management position in economic analysis, reporting, and open market operations. Job duties are essentially nothing except taking the fall for about $4Trillion of failed stimulus policies, inflationary counterfeiting of money, excessive monetization of the Federal Deficit, and leaking inside information to Wall Street banks and financial firms.  Less than stellar credentials preferred. Prior experience as a Congressional Staff Advisor, Lobbyist, Chicago BLS employee, or Rogue Trader a plus. In this position you will be required to attend hearings and participate in criminal investigations. However, you will not do any jail time, GUARANTEED. Send resume or CV to Mr. Jones, Marriner Eccles Building, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551

Random_Robert's picture

When the money goes to the bankers, the only way the bankers can generate any economic activity is to spend it, and since spending money conspicuously is frowned upon when your neighbors are eating cat food, the bankers are instead snorting the money up their noses...

Hence- the economies in central and south american countries that produce banker nose-candy are booming.

gwar5's picture

...this was also established when fat-ass Romer, et.al., failed and fell flat on their faces post-Porkulus. Diminishing returns. Debt swallows any stimulus and just leaves more debt. Some guys at Stanford also showed this would happen 15 years ago, was that Okun?


Who needs a fuckin' PhD for this shit anyway? Any credit counselor will tell you (for free) you can't pay off a credit card with another credit card.


yogibear's picture

Didn't old Yellen sleep her way to the top?  No wonder she seems like a Jewish ditz.

Venerability's picture

The Original Yolanda was mature and well-educated.

She should not let little boys with trade school degrees to fill in for her.

hardcleareye's picture

You are obviously incapable of constructing a convincing argument, hence the personal attack on her sex and religion.....


Mark123's picture

News Flash!


Banker parasites counfounded that host is dying after sucking all the blood out of it. 


Proposal by parsites to suck even harder to solve problem.

augustus caesar's picture

Once again the religion of the 'Scientifically Planned Utopia' is at a loss for words. They try to treat Economics like Physics and are constantly disappointed when they find that the Human Element refuses to be converted into dry and consistent numerical values.

hardcleareye's picture

Yup this is true.

But it helps if you work with accurate data instead of cooked books....... and stats

hardcleareye's picture

Is it possible that part of the reason Okums law appears to be "broken" is because the "numbers generated" by the BLS have been fucked with and do not represent "reality"...... 

I love what Biderman has to say about the BLS numbers on Trim Tab.