Unemployment and Output in 1974

Okun, Arthur M.
June 1974
Brookings Papers on Economic Activity;1974, Issue 2, p495
Academic Journal
This report discusses the puzzling behavior of unemployment in the U.S. in relation to real gross national product during the first half of 1974. From the fourth quarter of 1973 to the second quarter of 1974, the unemployment rate rose only from 4.7 to 5.1 percent, in the face of a 2 percent decline in real gross national product. The author cites previous instances in which unemployment was surprisingly low relative to output; these generally emerged in the late stages of economic expansion, when output slowed down and yet firms kept adding to employment in response to their previous experience and continuing buoyant expectations. Much the same behavior may have marked the first half of 1974. Firms interpreted the decline in output as a temporary interruption of economic growth caused by the oil embargo. In the author's judgment, these overly optimistic expectations, reinforced by encouraging income statements that reflected capital gains on inventories, produced unusually strong demand for labor during much of 1974. Businessmen now appear to be engaged in an agonizing reappraisal of the severity of the slump, and are likely to cut employment sharply in the months ahead. The author expects the unemployment rate to move further upward and cross 7 percent by mid-1975, even if real output does not fall further.


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