GDP Growth Does Not Always Reduce Unemployment

The relationship between unemployment and GDP is often explained by Okun’s Law. This law suggests that there is a predictable relationship between the two: for every 1% increase in the unemployment rate, a country’s GDP is expected to decrease by about 2%1.

Here’s a simplified explanation:

• Economic Growth: When GDP grows, it usually means businesses are producing more goods and services. To meet this increased demand, they hire more workers, which reduces unemployment.

• Economic Recession: Conversely, when GDP falls, businesses produce less, leading to layoffs and higher unemployment rates.

GDP and unemployment are closely linked because both reflect the overall health of an economy. When the economy is doing well, GDP rises, and unemployment falls. When the economy is struggling, GDP falls, and unemployment rises.

However, the GDP alone as an indicator has its limitations and may not entirely reflect economic conditions. This certainly appears to be the case in Windsor (at least within this time frame) where GDP has not always correlated to unemployment. Part of this might be due to a lagged effect of increased population and new immigrants taking longer to build connections, adapt, and contribute to the economy. Hence, GDP growth resulting from their contribution to the economy may not be reflected in immediately and unemployment may reduce down the line to catch up to GDP growth. The result of government policies in response to some of these changes may also be lagged and yield results later.

So while GDP is a crucial factor - and not one we argue against - GDP should not be the sole factor in assessing the region’s economy.

Note: Despite not being included in this graph due to GDP values ending in 2020, the unemployment rate in Windsor was about 6% in 2023. Showing a noticeable improvement. You can view our previous analysis.