“What appears to matter for a reduction in the unemployment rate is the rate of actual economic growth compared with the rate of growth in potential output (i.e., the output gap). Potential output is a measure of the economys capacity to produce goods and services when resources, such as labor, are fully utilized. The rate of growth of potential output is a function of the growth rates of potential productivity and the labor supply when the economy is at full employment. If, as projected, potential output growth is about 2.3% annually, then the growth rate in real gross domestic product (GDP) would have to be greater to yield a declining unemployment rate. How much it is above that level will determine the speed with which the unemployment rate declines. Although real GDP initially grew at a high rate, its pace slowed in the first three quarters of 2011. Improvement in the unemployment rate stalled as a result. The Congressional Budget Office (CBO) projects that the annual average growth rate of real GDP will not much exceed potential output until the 2013-2016 period. Unless the economy grows more strongly than currently projected, the unemployment rate is expected to remain close to 9.0% through 2013 before approaching its pre-recession level of 5.0% in 2016.”
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