On the first day of 2011, Princeton economist Paul Krugman ran an eye-opening chart in his New York Times column, illustrating the relationship between economic growth and unemployment.
The horizontal axis shows annual growth rates of real GDP [after adjusting for inflation]; the vertical axis shows the year-to-year change in the unemployment rate. “Two things are clear,” Krugman writes. “First, the economy has to grow around 2 1/2 percent per year just to keep unemployment from rising. [See the cluster of blue squares in the center of the chart where the change in unemployment ranges from 0 to -1% while GDP rises by at least 2.5%] Second, growth above that level leads to a less than one-for-one fall in unemployment, (because hours per worker rise, more people enter the work force, etc.). [People who have jobs are given more hours, and those who had given up looking for work, as well as recent graduates, join the work force.] Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point.”