Unemployment in Germany will reach 11% in 2010

We presented a model of the evolution of unemployment in Germany two years ago [1]. There are new readings of unemployment (from 2005 to 2007) and labor force (from 2004 to 2006) available from the OECD , and one can verify the model and extend it in time to predict beyond 2009.
Unemployment in developed countries is a function of labor force change [2-5]. There is a general expectation of a good fit between these two variables for Germany. Figure 1 presents the results of a simple manual trail-and-error process for the period between 1965 and 2007. Since such procedure is based on visual fit only, no statistical estimates of the residual were made.
The resulting relationship between unemployment and labor force in Germany is as follows:

UE(t) = 2.5*dLF(t-5)/LF(t-5) + 0.04, before 1995
UE(t) = 2.5*dLF(t-5)/LF(t-5) + 0.08, after 1995 (1)

where UE(t) is the rate of unemployment in Germany at time t, LF(t-5)is the level of labor force five years earlier. The observed unemployment needs a structural break to be introduced in 1995, which is easily explained by the reunification, i.e. 1990 plus the five-year lag. Free term in (1) underwent a significant increase, but the slope of 2.5 and the time lag of 5 years did not change, however. One can read (1) in the following way – a 1% increase in labor force in Germany results in 2.5 % increase in unemployment five years later. When the labor force does not change, the level of unemployment is constant at 8%.
An important finding here is that unemployment in Germany increases with increasing rate of labor force growth. So, the remedy against high unemployment in Germany consists in reduction of labor force growth. The estimates of unemployment are provided by the OECD and end in 2007. In 2008, the unemployment had to reach the bottom around 8%. In 2009, the rate of unemployment in Germany should be increasing due to the increase in labor force five years ago, not due to the crisis. In 2010, it will reach its peak value at 11% and then will start to decline in 2011. When available, new labor force estimates will allow predicting beyond 2011.
Figure 1. Observed and predicted rate of unemployment in Germany.

[1] Kitov, I., (2007). Exact prediction of inflation and unemployment in Germany, MPRA Paper 5088, University Library of Munich, Germany, http://ideas.repec.org/p/pra/mprapa/5088.html
[2] Kitov, I., Kitov, O., Dolinskaya, S., (2007). Inflation as a function of labor force change rate: cointegration test for the USA, MPRA Paper 2734, University Library of Munich, Germany, ideas.repec.org/p/pra/mprapa/2734.html
[3] Kitov, I., (2007). Inflation, Unemployment, Labor Force Change in European countries, in T. Nagakawa (Ed.), Business Fluctuations and Cycles, pp. 67-112, Hauppauge NY: Nova Science Publishers
[4] Kitov, I., (2007). Exact prediction of inflation and unemployment in Canada, MPRA Paper 5015, University Library of Munich, Germany, http://ideas.repec.org/p/pra/mprapa/5015.html
[5] Kitov, I., Kitov, O., (2009). Unemployment and inflation in Western Europe: solution by the boundary element method, MPRA Paper 14341, University Library of Munich, Germany

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