The rate of unemployment in the UK will likely rise to 9%

We estimated a version of Okun’s law for the UK in July 2011. We developed an integral version of Okun’s law and applied the LSQ method to estimate coefficient in :

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 (LSQ) coefficients.   The best-fit (Okun’s) model minimizing the RMS error of the cumulative model (1) is as follows:

du = -0.39dlnG + 0.63 (2)

The most recent estimate on the unemployment rate in the UK is 8.4% for the fourth quarter of 2011 as reported by the NSO for the economically active population between 16 and 64 years of age. The Conference Board has also published an estimate of real GDP per capita for 2011. Figure 1 depicts the observed and predicted curves of the unemployment rate, including the rates for 2011. The overall agreement is very good but the current rate of unemployment is lower than the predicted one by 0.6%.  Figure 1 suggests that the rate of unemployment has been driven by real economic growth and one can expect the rate to grow to the level of 9.0%. The will be no decease in the rate of unemployment if the growth rate of real GDP per growth does not exceed (0.63/0.39=) 1.63% per year.  In 2011, this rate was only 0.09%.

Figure 1.  The observed and predicted rate of unemployment in the UK between 1971 and 2011.