As in the previouspost, we refer to our model which links the rate of participation in laborforce, LFP, to the change in real GDP per capita. For short time intervals, one replaced labor force with employment, E, and GDP per capita with GDP. Now we use the rate of unemployment, UE, instead of the employment-population ratio, E/P. Unlike the E/P, unemployment negatively depends on real economic growth, i.e. should fall when dGDP/GDP is large. Thus, we scale the UE in the following way: dGDP/GDPdt = 1.1(8.0-UE), where coefficients 1.1 and 8.0 were estimated empirically. Figure 1 shows the evolution of dGDP/GDPdt and UE) in the U.S. after 1990. The latter variable is shifted 12 months back in order to fit the peaks and troughs in the dGPG/GDP between 1990 and 2010.
The overall agreement between the curves is excellent and allows forecasting the UE since the dGDP/GDPdt curve leads by 12 months. Then, the current UE (9.1%) value corresponds to May 2010 in the DGDP/GDP curve. Therefore, the rate of unemployment should fall to the level of 5% to 6% by the end of 2011.
Figure 1. The annual change rate of real GDP, dGDP/GDP, and the scaled rate of unemployment, UE.