## 7/9/11

### Bravo, Krugman!

A month ago I presented a graph linking the growth rate of real GDP per capita and the rate of unemployment. Figure 1 is borrowed from this post and shows that one can expect the rate of unemployment to  fall fast in the second half of 2011.

Figure 1. The annual change rate of real GDP, dlnGDP/dt, and the scaled rate of unemployment, UE.
Paul Krugman has modified this graph in order to prove that the current  rate of unemployment is a direct consequence of slow real growth. He plotted the change in unemployment rate against the change rate of real GDP.  In his scatter plot, correlation was very high.  I decided to repeat his result using GDP per capita instead of the overall GDP, which is a biased measure of growth in econometric assessments.  The only thing I have to say:
Bravo, Krugman!
This is almost the best economic graph I have ever seen. Figure 2 presents it in my interpretation and shows that the change in unemployment rate, du, almost coincides with the change rate of GDP per capita, dlnG. In Figure 2, we have scaled the du with the following relationship:
dlnG = -2.37du+2.25
or
du= -0.42 dlnG + 0.95
Figure 3 presents results of regression: Rsq.=0.81. For the scaled du, the slope is 1.0.

However, the current fall in the rate of unemployment exceeds the predicted one. Somehow, the sensitivity of the du to dlnG becomes lower after 2000, and the slope of -1.6 and the intercept of 2.1 better describe the link.  For these values of slope and intercept, the rate of real economic growth, dlnG, should be ~2% per year for the rate unemployment retained at 9.6%. For the rate of unemployment to fall, one needs the real growth rate above 2% per year.
Figure 1 looks a bit biased. We have also to reconsider this post on unemployment as based on the change in labor force, which predicted the rate of unemployment around 8% in 2012.
Figure 2. Annual growth rate of real GDP per capita, dlnG, and the scaled rate of unemployment, du.

Figure 3. Scatter plot of the curves in Figure 2 and linear regression.

Figure 4. Same as in Figure 2 with the slope -1.5 and intercept +2.0 for the period after 1995.