A year ago, we revisited our prediction of the rate of unemployment
in Italy made in 2008
and found that it was excellent. The model worked well. As it has an 11-year horizon,
we can check our old prediction for 2012 and 2013 (preliminary). A new estimate
of unemployment rate in 2012 is 10.6%. For 2013, the rate is 11.5 in March. There is no doubt, these values fully validate
our model of unemployment as a function of the change in labour force.
We introduced the model of unemployment in Italy in 2008
with data available only for 2006. The rate of unemployment was near its bottom
at the level of 6%. The model predicted a long-term growth in the rate
unemployment to the level of 11% in 2013-2014.
The agreement between the measured and predicted unemployment
estimates in Italy validates our concept which states that there exists a
long-term equilibrium link between unemployment, ut, and the rate of change of labour force, lt=dLF/LFdt. Italy is a unique
economy to validate this link because the time lag of unemployment behind lt is eleven (!) years.
The
estimation method is standard – we seek for the best overall fit between
observed and predicted curves by the LSQR method. All in all, the best-fit
equation is as follows:
ut = 5.0lt-11 + 0.07 (1)
As mentioned above, the
lead of lt is eleven
years. This defines the rate of unemployment many years ahead of the current
change in labour force.
Figure 1 presents the observed
unemployment curve and that predicted using the rate of labour force change 11
years ago and equation (1). Since the estimates of labour force in Italy are
very noisy we have smoothed the annual predicted curve with MA(5). All in all,
the predictive power of the model is excellent and timely fits major peaks and
troughs after 1988. The period between 2006 and 2013 was predicted almost
exactly. (If anybody knows a better prediction in 2008 of 2013 unemployment
rate please give us the link.) This is
the best validation of the model – it has successfully described a major turn
in the evolution of unemployment near its bottom. No other macroeconomic model
is capable to describe such dramatic turns many years ahead. Four years ago, we
expected the peak in the rate of unemployment in 2013-2014 at the level of 11%
(+5% from the level in 2008) and it has come!
The evolution of the rate
of unemployment in Italy is completely defined ten year ahead. Since the linear coefficient in (1) is positive
one needs to reduce the growth in labour force (see Figure 3) in order to
reduce unemployment in the 2020s. For the 2010s everything is predefined
already and the rate of unemployment will be high, i.e. above 9%.
Figure 1. Observed and
predicted rate of unemployment in Italy.
Figure 2. The rate of growth
in labour force.
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