A Two-Year Forecast of Unemployment in South Carolina

 

PETE EICH

College of Business

Western Carolina University

 

Abstract

 

South Carolina’s unemployment rate is expected to drop about 1½ percent over the next two years. This forecast is based on lagged unemployment and the index of leading indicators from the years 1980 until 1999. These two variables were used because of the strong correlation between them. The results of a regression of these two variables revealed that unemployment will continue its current trend of decreasing. Since the government is in favor of low unemployment, they will most probably continue efforts to keep it this way (JEL: E24, E66).

 

Part 1. Introduction

 

This paper forecasts the monthly unemployment rate for the years 2000 and 2001. The explanatory variables are lagged unemployment and the index of leading indicators. The sample period for this data is from January of 1980 until December of 1999.

 

When unemployment is low, employers will usually increase wages in an attempt to get more help. However, when unemployment is high, wages will slowly decrease, but workers don’t want to work for less than normal. This causes unemployment to linger. It is important to predict the unemployment rate so employers can anticipate this. Forecasting unemployment is also helpful to people planning to enter the workforce in North Carolina as well as South Carolina. The forecast of unemployment is for only two years because the further into the future one tries to forecast the more inaccurate the results become.

 

The rest of this paper is organized as follows: Part 2. presents the data used to forecast unemployment for   2000 and 2001; Part 3. presents the theoretical basis for the approach adopted in forecasting unemployment; Part 4. presents a forecast of unemployment for 2000 and 2001; Part 5. evaluates the importance of the forecast for the economy; and Part 6. discusses conclusions for economic policy. 

 

Part 2. Data

 

The data used are monthly lagged unemployment and the index of leading indicators from January of 1980 until December of 1999. The measure of South Carolina unemployment was taken from the Bureau of Labor Statistics, variable LAUST45000003. Seasonally adjusted unemployment could have been used for a more detailed forecast but the Bureau only reported it at a federal level, not a state level. Consequently, this unemployment rate is not seasonally adjusted. The index of leading indicators, variable LEAD, was found in the Federal Reserve Bank of St. Louis Federal Reserve Economic Data (FRED) and it is seasonally adjusted. The forecast horizon is two years into the future.

 

One could also use inflation, or exports to obtain a prediction of unemployment. This prediction may or may not be predictable, however. This is never known until executed.

 

The index of leading indicators and past unemployment can be used to predict future unemployment due to trends. The regression analysis, which was conducted on these data sets, supports this. No transformations other than lagging were performed on the data.

 

Part 3. Economic Theory:

Forecasting By Past Trend

 

Lagged monthly unemployment rates are used to project future unemployment in South Carolina for the years 2000 and 2001. The index of leading indicators was lagged to project the same thing. This yields the forecasting equation, which can be used to predict unemployment two years into the future. This forecast assumes unemployment is a function of lagged unemployment and lagged indexes.   

 

ut = f(ut-2, indt-2)

 

Part 4. Empirical Results:  Forecast of South Carolina Unemployment Rates for 2000-2001

 

The unemployment forecasting equation was estimated using 1980-1999 monthly data. The simple regression method was used to find the following results.

 

Table 1

Regression Estimate of Unemployment Rate Forecasting Equation:

Explanatory Variable

Estimated Coefficient

T-statistic

Intercept

49.42287318

17.02725632

X Variable 1

-0.227840758

-3.72961877

X Variable 2

-0.426599491

-16.01697062

 

In addition, from 216 observations, R square turned out to be 0.63, which is pretty good. Also, the adjusted R square came out to 0.626. This indicates that approximately 63 percent of the variation in unemployment can be explained by the explanatory variables.

 

The following table reports the forecast of unemployment rates in South Carolina for all months of the years 2000 and 2001:

 

Table 2

Forecast of SC Unemployment

 

Year                                               Month                                        Forecast

2000

Month 1

3.758262

2000

Month 2

3.655974

2000

Month 3

3.77571

2000

Month 4

3.752926

2000

Month 5

3.684574

2000

Month 6

3.610406

2000

Month 7

3.303062

2000

Month 8

3.416982

2000

Month 9

3.485334

2000

Month 10

3.397106

2000

Month 11

3.297726

2000

Month 12

3.257974

2001

Month 1

2.885186

2001

Month 2

2.731514

2001

Month 3

2.939478

2001

Month 4

2.913786

2001

Month 5

2.740238

2001

Month 6

2.498338

2001

Month 7

2.393142

2001

Month 8

2.43871

2001

Month 9

2.413018

2001

Month 10

2.32479

2001

Month 11

2.242378

2001

Month 12

2.162874

 

This forecast is favorable and it accordingly reflects the booming economy.

 

Part 5: Forecasting Implications:  A Continuing Decrease in Unemployment

 

South Carolina has one of the higher unemployment rates of the states. However, this hopeful forcast predicts that the unemployment level will continue its current trend of decreasing. Current markets for employment should become increasingly stronger and people looking for employment should have less trouble finding it. 

 

In theory, when the unemployment level decreases, the government pays less unemployment benefits. Therefore, the government, the Fed and most firms would tend to want to continue to influence unemployment rates to stay low.  The government should not participate in any activities that would raise it back up again.

 

Part 6. Policy Conclusions

 

It is expected that the unemployment rates in South Carolina will continue their current trend and fall into the year 2002. In December of 1999, the unemployment rate was 3.9 percent. The projections gathered estimate that this rate will fall about ¾ percent per year to 2.16 percent by December of 2001.

 

References

 

Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) (12-30-99), http://www.stls.frb.org/fred/ (1-29-00)

 

Bureau of Labor Statistics, Bureau of Labor Statistics Data, http://146.142.4.24/cgi-bin/surveymost