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Piecing Together the Job-Picture Puzzle

Wall Street Journal (03/12/12) Jon Hilsenrath

The unemployment rate has fallen 0.7 percentage point from a year earlier, companies have expanded payrolls by more than 200,000 a month for the past three months, and the number of people filing claims for government unemployment benefits has fallen. Despite all this, the economy is barely growing, with many economists in the past few weeks having again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012.

Traditionally, economists have believed that when the economy grows faster than its long-run trend, the unemployment rate tends to fall by about half as much as the additional growth in percentage terms. So growth of 3.5% in a year—one percentage point above a long-run trend of 2.5%—would bring down the unemployment rate by a half percentage point in that year. However, that rule has been unreliable lately.

Christina Romer, President Barack Obama’s former chief economic adviser, has a theory for why the jobless rate rose more than predicted during the recession and why it has fallen more than the rule predicted since the recession: She believes that company managers were so shocked by the financial crisis in 2008 and 2009 that they fired workers more aggressively than they would in a conventional downturn. Over the past six months, she continues, as fear and uncertainty have dissipated, firms appear to have reversed course and gone back toward more normal staffing levels. Romer worries that these overshoots might soon run their course and that the traditional rule will reassert itself, potentially keeping the unemployment rate at high levels because the economy isn’t growing fast enough to justify more hiring.