President Trump compared growth in GDP and unemployment to much displeasure and negative criticism of macroeconomists and pundits.
Specifically, the President described the current economic moment positively as the unemployment rate percentage was nominally lower than the percentage rate of GDP growth.
How could unemployment and GDP be linked?
For instance, Rudd and Whelan argue the labour wages portion of GDP is not a good measure of either output gap or inflation, contradicting Woodford’s estimation of the new Philips curve – that assumes ULC and unemployment are related.
Conversely, Tatierska for the Central Bank of Slovakia validates the curve’s prediction and finds a nexus between labour costs and prices via marginal costs that vary proportionately to the cost of labour.
Labour costs increase the elasticity of labour demand for industries where labour costs are a high proportion of total costs such as certain service industries. The elasticity of labour demand is also affected by the rate of substitution between capital and labour – and it has impacted the participation rate, at least in Europe.
The effect of either increasing investment or capital on labour intensity of GDP is not immediately visible in German statistics plotted above. Bruegel concludes labour and capital in Germany are in fact complementary.
Assuming a stable savings rate, a declining labour intensity in GDP that would hint at lower consumption even as employment and investment are increase.
What Trump notices is (perhaps) the low elasticity of labour substitution that enables increasing investment and wages to positively influence GDP.
The twin increase is not new nor it directly determines growth of GDP – yet it is still good news.