Question

As your final assignment, you are charged with describing the empirical connection between unemployment and real GDP growth, i.e. Okun’s Law. Please use FRED to acquire all the data asked for below. Furthermore, only study the time period from 1970-today, at an annual frequency.

a. In one (well labeled) figure, plot the change in the unemployment rate (“Civilian Unemployment Rate”) versus time and real GDP growth versus time. In a professional looking table, report the following summary statistics: mean, variance, and number of data points for both time-series. Furthermore, please report, the covariance of the change in unemployment with real GDP growth.

b. Using Okun’s law (as discussed in class) and the observed change in unemployment, compute predicted real GDP growth. In one (well labeled) figure, plot predicted real GDP growth versus time and actual real GDP growth versus time. How well does Okun’s Law perform? In your report provide a brief discussion of what you see. Please provide special attention to time periods in which there is disagreement.

c. Advanced. Please compute the ratio of the covariance of the change in unemployment and real GDP growth relative to the variance of the change in unemployment. In your report, discuss the following: Is this value larger or smaller than 2? How does it relate (or not) to the performance of Okun’s law that you found in part b?

Answer 1

Answer-

Unemployment. Over time, the growth in GDP coupled with a tight labor market will increase the inflation rate. ... Higher inflation rate will have an exponential effect on prices, rapidly eroding the consumer buying power. This in turn will slow the economy down, will reduce GDP, and will increase unemployment rate.

That change in methodology in 2010 means that ANY comparison of unemployment between unemployment rates in 2017 with any year prior to 2010 is just a meaningless exercise in story telling.Okun’s law investigates the statistical relationship between a country’s unemployment rate and the growth rate of its economy. The economics research arm of the Federal Reserve Bank of St. Louis explains that Okun’s law “is intended to tell us how much of a country’s gross domestic product (GDP) may be lost when the unemployment rate is above its natural rate.” It goes on to explain that “the logic behind Okun’s law is simple. Output depends on the amount of labor used in the production process, so there is a positive relationship between output and employment. Total employment equals the labor force minus the unemployed, so there is a negative relationship between output and unemployment (

Despite the fact that there are in reality many moving parts to the relationship between unemployment and economic growth, there does appear to be empirical support for the law.