A year ago, we described the evolution of unemployment in Spain using the LSQ technique as applied to the integral version of Okun’s law:
u(t) = u(t0) + bln[G/G0] + a(t-t0) (1)
where u(t) is the rate of unemployment at time t, G is the level of real GDP per capita (we used TED, Conference Board, EKS PPP ), a and b are empirical coefficients. The best-fit (dynamic) model for Spain minimizing the RMS error of the cumulative model (1) is as follows:
du = -0.406dlnG + 2.00, t<1995
du = -1.11dlnG + 1.54, t>1994 (2)
This model suggests a big shift in the slope and a smaller change in the intercept around 1995. Having a new unemployment estimate for 2011, we have updated Figure 1 (original Figure 1) from our previous post and confirmed the excellent predictive power of the model. The predicted value is 21.4% and that borrowed from the U.S. BLS is 21.8%.
Figure 1 also shows a prediction (red circle) of the unemployment rate in Spain in case of a 10% fall in real GDP per capita in 2013. The current economic performance in Spain is awful and some experts see a GDP fall of 25%. We are scared to publish the number for the fall by a quarter of the current GDP level since even a 10% fall will result in a 33% rate of unemployment. Essentially a one third of labor force will be unemployed. Unfortunately, even a zero GDP growth rate will result in a 1.5% increase in unemployment (see eq. 2).
Figure 1. The observed and predicted rate of unemployment in the Spain between 1971 and 2011.
In 2013, the rate may reach 33% in case of 10% fall in real GDP.
The cumulative form of the dynamic Okun’s law is characterized by standard error of 1.68% for the period between 1971 and 2011 (0.92% after 1995). The average rate of unemployment for the same period is 13.6% (14.6% after 1995) with a standard deviation of the annual increment of 2.12%.