Following the previous post on inflation in Australia, we present a similar model for the rate of unemployment .
It has been empirically revealed and statistically tested that the rate of unemployment, in developed countries is a linear function of the change in labor force. We expect the same relationship to be valid for Australia. A simple trial-and-error method applied to cumulative unemployment published by the Australian Bureau of Statistics at a monthly rate (see Figure 1) allows to accurately estimating both coefficient in the linear relation:
UE(t) = -2.1dLF(t)/LF(t) + 0.0977; t>1995
UE(t) = -2.1dLF(t)/LF(t) + 0.131; t<1996 (1)
Because of the change in monetary policy around 1995, we had to split the modeled period into two segments: before and after 1995. The above relationships show that only free term did change in 1996 from +0.131 to +0.099. The slope in the linear relationship is the same over the entire period. All in all, the agreement between the annual and cumulative curves is excellent. One can predict the rate of unemployment at any time horizon using labor force projections. We have failed to find any projection published by the Australian Bureau of Statistics except the one between 1999 and 2016. Unfortunately, this projection was all wrong and heavily underestimated the growth in labor force. It predicted the level of labor force in 2016 at 10,800,000. In December 2010, the level of labor force was 12,132,900. This is good news, however. According to (1), a higher rate of labor force results in a lower rate of unemployment.
Figure 1. Upper panel. Monthly estimates of the rate of unemployment in Australia and that obtained from labor force using (1). Due to high-amplitude fluctuations in the monthly estimates of dLF/LF, the predicted curve is smoothed by a twelve-month moving average, MA(12). Lower panel. Cumulative values of the observed and predicted curves in the upper panel. Notice excellent agreement between the cumulative curves.