United States Unemployment 2005 based on Inflation and Interest Rates
Western Carolina University
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.
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.
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.
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)
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.
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
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.
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.
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.