United States Unemployment 2005 based on Inflation and Interest Rates

 

DAVID PARKS

College of Business

Western Carolina University

 

Abstract

This paper forecasts the unemployment rates for the next six years into the future. The paper gives a brief description of what unemployment rates are and how they are important in deciding the overall well being of the economy as a whole. The paper includes a five-year forecast and a least square regression equation is used to predict the projected unemployment rate. The paper sums up the forecasted data and gives meaning to the findings. The unemployment rate is expected to rise from 4% in the year 2000 to about 6% in the year 2005. It appears that there will be a 2% increase in unemployment over the projected years.

 

Part 1. Introduction

 

The purpose of this paper is to forecast the United States Unemployment Rate for the years 2000 through 2005. The sample period is from January 1981 through December 1999.The explanatory variables used in this six year forecast consist of prior unemployment rates, inflation rates, and three-month Treasury bill rates. The data used is taken from the years 1981 through 1999.

 

When inflation increases significantly, deficit spending units, which are people, institutions, and other organizations that spend more or all of their incomes, rush to banks to take out loans in order to be able to cope with the higher prices. The surplus spending units, which are groups that do not spend all of their income and usually choose to save, become hesitant about putting their capital in savings and financial instruments. If the real interest rate becomes negative, people prefer to hold their wealth in things that are better stores of value such as non-perishable material items. For example, people may choose to buy tennis shoes with their money and sell them because their value is more stable than the fluctuating dollar. The shortage in supply of loanable funds will eventually cause interest rates to rise. With higher interest rates, corporations and small businesses are unable to borrow the capital needed to expand and keep production going. The end result is higher unemployment. If there is a large supply of loanable funds, there will always be jobs and production. However if the supply of loanable funds decreases then firms are forced to lay off workers. Inflation also affects firms in more ways than a lack of loanable funds. Sidney Weintraub points out in his book Our Stagflation Malaise, “Some of the debasement in corporations technological capacity is undoubtedly attributable to inflation and to high interest rate monetary maneuvers to check the price upheaval. Inflation incontrovertibly eats away the real value of depreciation funds amassed to replace equipment” (26). An accurate prediction of unemployment rates can help government agencies prepare for times of unemployment and possibly take steps to prevent foreseen high unemployment.

 

The following portions of this paper cover: Part 2. the sources of data used in this forecast; Part 3. economic theory; Part 4. forecasts unemployment rates; Part 5. forecast implications; and Part 6. policy conclusions.

 

Part 2. Data

 

Data are taken from the Federal Reserve Bank of St. Louis Federal Reserve Economic Data (FRED). Unemployment rates, inflation rates and three- month Treasury bill rates are observed monthly. Only unemployment rates are seasonally adjusted. The sample consists of the years 1981 through 2005. The forecast horizon is five-years into the future. This forecast assumes that all other factors are held constant (ceteris paribus), except for the three factors being observed. By finding projected future inflation, unemployment rates and three-month Treasury bill rates, which serves as an indicator for interest rates, the unemployment rate will be calculated for each year up to 2005. Other variables could have been used in this forecast such as GDP, GNP, etc.; however, the chosen three variables were chosen due to their close relation with each other. According to the short-run Phillips curve, inflation and unemployment are two factors that are inversely related. Interest rates are pertinent because they affect the borrowing power of firms, which affects expansion, development, and growth of firms. These issues affect employment.

 

Part 3. Economic Theory

 

Past unemployment rates are used to predict future unemployment rates through a regression. This paper employ future unemployment rates to be a function of prior unemployment rates, inflation rates, and interest rates (three-month Treasury bill rates). As stated earlier this forecast assumes that all other factors are held constant.

 

u=f(ut-1, inflt, rt)

 

In the model above “u” is the unemployment rate, infl represents inflation, and “r” is the real interest rate.

 

If the variables are lagged by five years, we arrive at an equation that will allow us to predict the unemployment rate five years into the future.

 

u=f(ut-5, inft-5, rt-5)

 

Part 4. Forecast for Unemployment Rates

 

The forecast was derived by using an ordinary least square regression for the years 2000 through 2005.The R-squared of the estimate is 0.205586. The F-statistic for the joint null hypothesis of zero slopes is13.19827.The intercept is 6.850324, X1 is –0.30568, X2 is –0.21741, and X3 is 0.210317. The probability level of this data is very low, at 0.00066, which is good and the t statistics is falls significantly away from 0 at –3.48.

 

Table 1

Regression Estimates From Least Squares Regression

 

Explanatory Variable

Estimated Coefficient

T-statistic

Intercept

6.85

16.45

ut-5

-0.306

-3.48

Inflt-5

-0.217

-4.10

Rt-5

0.210

5.70

R-squared= 0.205586

F (zero slope)= 13.20

 

 

 

Y=6.850324–0.30568x1–0.21741x2+0.210317x3

 

The adjusted R-squared is 0.19009, which indicates that 19% of the changes in the unemployment level is due to the three variables in this forecast.

 

Table 2 gives us the unemployment rates for the years 2000 through 2005.

 

Table 2

Forecast U.S. Unemployment 1999 - 2005

 

Month/year                                                                                        Unemployment rate

Jan-00

 

4.00

Feb-00

 

5.24

Mar-00

 

5.26

Apr-00

 

5.32

May-00

 

5.45

Jun-00

 

5.57

Jul-00

 

5.55

Aug-00

 

5.54

Sep-00

 

5.50

Oct-00

 

5.71

Nov-00

 

5.77

Dec-00

 

5.92

Jan-01

 

5.92

Feb-01

 

5.97

Mar-01

 

5.90

Apr-01

 

5.77

May-01

 

5.91

Jun-01

 

5.90

Jul-01

 

5.86

Aug-01

 

5.86

Sep-01

 

5.89

Oct-01

 

5.88

Nov-01

 

5.90

Dec-01

 

5.89

Jan-02

 

5.82

Feb-02

 

5.81

Mar-02

 

5.81

Apr-02

 

5.78

May-02

 

5.74

Jun-02

 

5.88

Jul-02

 

5.82

Aug-02

 

5.86

Sep-02

 

5.81

Oct-02

 

5.85

Nov-02

 

5.82

Dec-02

 

5.79

Jan-03

 

5.84

Feb-03

 

5.83

Mar-03

 

5.94

Apr-03

 

5.93

May-03

 

5.96

Jun-03

 

5.94

Jul-03

 

6.04

Aug-03

 

6.06

Sep-03

 

5.97

Oct-03

 

6.02

Nov-03

 

6.04

Dec-03

 

6.06

Jan-04

 

6.19

Feb-04

 

6.19

Mar-04

 

6.12

Apr-04

 

6.22

May-04

 

6.15

Jun-04

 

6.09

Jul-04

 

6.12

Aug-04

 

6.17

Sep-04

 

6.14

Oct-04

 

5.94

Nov-04

 

6.12

Dec-04

 

6.05

Jan-05

 

6.00

Feb-05

 

6.06

Mar-05

 

6.05

Apr-05

 

5.99

May-05

 

6.03

Jun-05

 

6.11

Jul-05

 

6.05

Aug-05

 

6.07

Sep-05

 

6.10

Oct-05

 

6.09

Nov-05

 

6.14

Dec-05

 

6.14

 

 

Part 5. Not Too Bad

 

The unemployment rate tells a lot about the economy. When there are high unemployment rates, we know that the condition of the economy is not stable. There are many individuals that are without employment and unable to provide for their basic needs. This forecast shows that the unemployment rate is expected to rise. However, the increase in the unemployment rate is not large enough to cause serious problems in the economy. The unemployment rate is expected to rise from 4% in the year 2000 to 6.135603% in 2005. Although the unemployment rate will rise a little, there will still be employment for hardworking, motivated individuals.

 

Part 6.  Conclusion

 

Unemployment is defined as the number of people who are looking for work, but have no job.  This forecast attempts to predict the unemployment rates for the years 2000 through 2005. From the projected unemployment rates there seems to be an increase in unemployment rates. However, the increase is not large enough to cause a major impact on the economy. There is only a 2.136% increase in the unemployment rates through the year 2005.

 

References

 

Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) 31 Jan. 2000  http://www.stls.frb.org/fred/

 

Sidney Weintraub, Our Stagflation Malaise, Ending Inflation and Unemployment. Wesport: Quorum Books, 1981.