Can the U.S. economy grow faster now that we are at 4.4 percent unemployment? The experience of fast-growing communities in the Pacific Northwest suggests that we can keep growing, but not too rapidly.
Total economic growth depends on two factors: growth of jobs, and growth of productivity, or output per worker. This article will address the first issue, whether jobs can continue to grow with low unemployment.
Several metropolitan areas in the Pacific Northwest have reached the 4.5 percent unemployment mark, and they all continued to grow since then.
Seattle-Tacoma is the largest example. In June 2016, unemployment fell to 4.5 percent, thanks to job growth at 3.2 percent. In the most recent data, unemployment has dropped even further, to 3.5 percent as job growth continued strong. Boise also continued its fast employment growth well after unemployment reached 4.5 percent. Their unemployment rate is now just 3.2 percent.
Bill Conerly using BLS data.
Seattle-Tacoma job growth compared to U.S.
Portland is an example of a community that slowed after unemployment dropped. In February 2016, the metro area hit the 4.5 percent unemployment level, thanks to 3.3 percent job growth. They now have just 3.5 percent unemployment, but job growth has dropped to 2.1 percent. That is still a pretty good pace, but not as strong as a year ago. Salem and Couer d'Alene also slowed their growth rates, but unemployment still dropped after the 4.5 percent threshold was crossed.
All of these communities had above-average population growth over this period, making more labor available despite the low unemployment rates. In the cases of Seattle and Boise, the population growth was sufficient to enable businesses to keep hiring. In Portland, Salem, and Couer d'Alene, population growth did not accelerate enough to enable employers to keep hiring.
There are two lessons for the United States economy as a whole from these examples. First, the current unemployment rate is not a barrier to further economic expansion. We economists often think of 5.0 or 5.5 percent unemployment as the natural rate, which reflects the normal time that it takes a worker and an employer to find a match. This is not an iron barrier, however. When the unemployment rate is low, people come out of the woodwork. Some who had been too discouraged to actively look for work (and therefore were not counted as unemployed) hear from friends that a company is hiring and quickly get a job. Stay-at-home moms who had not been looking for work are recruited by their friends to job openings. And with fewer layoffs, older workers stay on the job longer.
The second national lesson is that population growth plays an important role in enabling job growth. One of the less recognized facts about the U.S. economy today is that our population growth is the slowest it has been since 1937. Unless we open up the floodgates to foreign immigrants, the upside potential of the U.S. economy is limited. Right now, employment is growing nearly one percentage point faster than population is growing. That can probably continue for a year or two. We could even have some acceleration, say to 2.5 percent job growth, for a year. GDP growth might accelerate from the 2 percent increase we have had over the last four quarters to 3 percent, but just for one year or so.
No economic stimulus or Buy America policy can overcome the obstacle of low growth of the labor force. If GDP growth is to hit the Trump administration's goal of 4 or 5 percent, then we will need an acceleration of productivity growth. That is a subject for another article.
The final thing that we have not discussed is what would trigger faster growth. The President's deregulation proposals would help, but gradually. Revising foreign trade deals and preventing immigration will not be stimulative. On the positive side, most economic growth happens not because of policy stimulus, but because the private sector sees opportunities. That could very well happen independently of anything that the Trump administration does.