A Forecast of North Carolina Unemployment Rates
For 20012002 Using Past Inflation
RENEE LEWIS and CYNTHIA BROWN
College of Business
Western Carolina University
Abstract
This
paper forecasts unemployment rates for North Carolina for the years 2001
and 2002 using past consumer price index data.The
Phillips Curve is used in this paper because of the inverse relationship
between inflation and unemployment rates.Unemployment
rates and the consumer price indices for the years 19912000 were used
to forecast 2001 and 2002 unemployment rates for North Carolina.The
unemployment rate for North Carolina is forecast to rise to 3.18% and then
fall to 2.66%.The Phillips Curve
is an appropriate measure for unemployment rates based on inflation in
this case because it represents the inverse relationship between inflation
and unemployment rates. (JEL:E24)
Part 1. Introduction
This paper
forecasts the unemployment rate for North Carolina for the years 2001 and
2002.The forecast is estimated using
consumer price indices from the years 1991 until 2000.This
data is monthly and not seasonally adjusted.
Using
the Phillips Curve, the inverse relationship between inflation and unemployment
is apparent.Whenever unemployment
is high, inflation tends to be low. When
unemployment is low, inflation tends to be high.Forecasting
unemployment accurately is important because it helps economists to have
a better idea of what the future economy holds.Another
important reason for accurate forecasts is the fact that many job seekers
are interested in this data before making a final decision about a job.
The
rest of this paper is as follows: Part 2. presents CPI and past unemployment
rates data and where it was taken from; Part 3. presents the economic theory
behind this forecast; Part 4. presents the actual forecast of unemployment
rates for 2001 and 2002; Part 5. outlines forecast implications; and Part
6. is where all conclusions are drawn.
Part 2. Data
All data was
taken from the Bureau of Labor Statistics web site.Unemployment
rates for North Carolina are given in BLS variable LAUST37000003.The
consumer price index variable is CUUR0300SA0.The
unemployment rate and consumer price index is calculated on a monthly basis
on the BLS site, but were not seasonally adjusted.The
forecast horizon is two future years, 2001 and 2002.
The
forecast unemployment rate is based on past consumer price index data from
the years 19912000.None of the
data was altered or transformed in any way. Since monthly figures were
used, the forecast data shows the estimates for all twelve months of the
year as well.
The
Phillips Curve is a graphic representation of the economic relationship
between unemployment and inflation.A.W.
Phillips found there is an inverse relationship between the two.As
prices and wages go up, the unemployment rate tends to go down.This
is intuitively appealing because more are out to get jobs when inflation
increases due to price/wage changes.Whenever
an employer raises wages, more people may come to work, lowering the unemployment
rate.
Part
3. Economic Theory: Predicting North Carolina Unemployment with the
Phillips Curve
The forecast
only goes into the future two years.Since
the Phillips Curve deals with shortrun data.
Unemployment
rate is a function of consumer price index:
u
= f
(p)
The
Phillips Curve shows this equation graphically.Due
to unemployment being a function of consumer price index, the equation
CPI variable is lagged for the current year. This lagged equation was used
in forecasting the rates for 2001 and 2002.In
part four, it is discussed how the numbers plugged into the equation were
calculated.
Part
4. Empirical Results
A Shortterm Forecast
Of North Carolina’s Unemployment Rates for 20012002
The equation
used for forecasting was estimated through the least squared regression
method, utilizing observations gathered from 19912000.The
rsquares estimate is .6123.The
fstatistic is 2.86208E21.There
was a probability of 9.08E32 of committing a Type I error for the intercept
parameter.A probability of 2.86E21
of committing a Type I error occurred in the estimation of the lagged consumer
price index.
The numbers
12.89 and .06 were calculated by using the least squares regression.These
numbers plugged into the unemployment equation gave the forecasted rates
for 2001 and 2002.
Table 1
Regression
Statistics

Intercept:

12.89

tstat

17.75

Pvalue

9.08
E32

CPI
(2)

.0607

tstat

12.29

Pvalue

2.86
E21

R
Square

.6164

Table
2
Actual
Forecast for 2001 and 2002

Month/
Year

Forecast

January
2001

3.18

February
2001

3.17

March
2001

3.13

April
2001

3.08

May
2001

3.07

June
2001

3.07

July
2001

3.04

August
2001

3.01

September
2001

2.98

October
2001

2.95

November
2001

2.96

December
2001

2.95

January
2002

2.92

February
2002

2.88

March
2002

2.78

April
2002

2.76

May
2002

2.76

June
2002

2.72

July
2002

2.69

August
2002

2.69

September
2002

2.65

October
2002

2.65

November
2002

2.65

December
2002

2.66

Part
5. The Future Looks Better in 2002 for North Carolina Residents
As
it turns out, unemployment will rise in 2001and than decrease by 2002.This
forecast was important in order to measure the condition of the economy
in 2001 and 2002.It is important
to the residents of North Carolina to see what the relationship between
unemployment and inflation holds for the future.Based
on the data, unemployment will be lower in 2002 than it has been in the
past ten years.This forecast turned
out to be favorable for the employees and residents of North Carolina.Assuming
the natural rate of unemployment is 5%and this forecast has accurate estimates,
North Carolina rates are considerably lower than the natural rate.
Part
6. Policy Conclusions
North Carolina’s
unemployment rates are projected to rise 3.18% in 2001 and then fall to
2.66 % in 2002.This will be one
of the lowest rates North Carolina has seen in over ten years, and will
be good for the economy and the working class.The
North Carolina rate compared to the assumed natural rate of 5% is good.To
keep unemployment rates low the government should continue implementing
current monetary policies because they obviously working for North Carolina.
References
Bureau
of Labor Statistics, http://146.142.4.24/cgibin/surveymost/accessed
February 2001
The
Phillips Curve, http://econ161.berkley.edu/multimedia/Pcurve1.htmlaccessed
February 2001
Phillips
Curve, http://www.britannica.com/seo/p/phillipscurve/accessed
February 2001