Will a Soft Landing Hurt?
Subject Unemployment
Topic Productivity and Growth
Key Words Soft Landing, Productivity, Unemployment
News Story

With more and more economic data pointing to slower growth and moderate inflation, some economists believe the Federal Reserve may have guided the economy to the desired soft landing. While soft landing means that the economic growth has slowed without a recession, it doesn't mean that unemployment will not increase. Some analysts believe that the economy's large productivity increases will result in larger unemployment than would occur if the productivity rate were at its historical average. Higher productivity also means that fewer workers can produce the same amount.

Gross Domestic Product (GDP) is increasing at a 6 percent rate, while payrolls are rising at 1.8 percent. If, as some argue, a 1.8 percent job growth is associated with a 6 percent rise in GDP, then a 2 to 2.5 percent increase associated with a soft landing could actually increase unemployment by 0.5 to 1.0 percent.

James Paulsen, chief investment officer at Wells Capital Management, has studied the relationship between job creation and economic growth. He found that in the early 1980s, each percentage-point increase in economic growth resulted in a 0.61 percent increase in the number of jobs. Since 1995, however, each percentage-point increase has led to just 0.1 percent more jobs.

A soft landing could disadvantage workers in other ways. In the past, firms would generally consider cutting capital spending first in the face of an economic slowdown. In today's environment, capital spending is as much programmed for efficiency improvements as it is for expansion. Firms could therefore consider cutting labor costs and maintaining capital expenditures.

The data on installment and stock market margin debt indicate that individual workers may be more vulnerable to job loss. Consumer debt now amounts to 24.5 percent of disposable personal income, substantially higher than the average of 18.4 percent from 1965 to 1995.

(Updated October 1, 2000)


1. Define productivity. How is it measured?
2. Explain how an increase in productivity could result in fewer people being employed when economic growth slows.
3. If workers become unemployed and reduce their spending, how are other sectors of the economy affected?

Source Gretchen Morgenson, "Why a Soft Landing Could Be Worse This Time," The New York Times, September 10, 2000.

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