Profile image
By Economics as Classical Mechanics (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

In the long run, the rate of unemployment in Canada will be growing. A four year update.

Wednesday, January 11, 2017 15:02
% of readers think this story is Fact. Add your two cents.

(Before It's News)

Here, I continue presenting cases of accurate predictions based on the link between real GDP and unemployment, which is a modified Okun’s law in an integral form. This is a four-year update for Canada. The model prediction is getting better and better!
Canada provides an excellent set of macroeconomic data, which can be described by a few deterministic links with a high level of reliability and confidence. We have retrieved real GDP (GK per capita) data from the Total Economic Database and the rate of unemployment from the OECD. In 2012, we published a paper in the Journal of Theoretical and Practical Research in Economic Fields, where presented the first version of the modified Okun’s law for developed countries including Canada. The model was estimated till 2010 and used the data available in 2011.
The original model for Canada was also presented in this blog in 2011. It’s time to revisit the model and its predictions. It has to be mentioned that all coefficients below were estimated 6 years ago and we do not change them. Overall, the model is estimated using the LSQ technique to the integral version of Okun’s law:

u(t) = u(t0) + bln[G/G0] + a(t-t0) (1)


where u(t) is the predicted rate of unemployment at time t, G is the level of real GDP per capita, a and b are empirical coefficients. For Canada, we estimated the model with a structural break allowed by data somewhere between 1980 and 1990. The best-fit (dynamic) model minimizing the RMS error of the cumulative model (1) is as follows:

du = -0.28dlnG + 1.16,  t before1983
du =
-0.28dlnG + 0.30,  t after  1982 (2)

This model suggests no shift in the slope and a bigger change in the intercept around 1983. Figure 1 depicts the observed and predicted curves of the unemployment rate. Considering the accuracy of measurements for both involved variable the fit is excellent. The integral form of the dynamic Okun’s law (1) is characterized by a standard error of 0.66% for the period between 1971 and 2016. The average rate of unemployment for the same period is 8.12% with a standard deviation of the annual increment of 0.92%.  Figure 2 shows that when the observed time series is regressed against the predicted one, R2=0.87.  

One can suggest that the rate of unemployment has been driven by real economic growth and there is no much room for other macroeconomic variable to intervene. Currently, Canada need approximately 1% per year increase in GDP per capita in order unemployment to fall. Otherwise, it will be growing as it was in 2015 and 2016. With decaying economic growth, as described in this post, the rate of unemployment will be growing in Canada.


Figure 1. The observed and predicted rate of unemployment in the Canada between 1970 and 2016.

Figure 2. The measured time series is regressed against the predicted one. R2=0.87 with both time series likely to be stationary.



Source: http://mechonomic.blogspot.com/2017/01/in-long-run-rate-of-unemployment-in.html

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories
 

Featured

 

Top Global

 

Top Alternative

 

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.