In-Module Assessment Academic Session 2011/12
United Kingdom Econometric Model: Unemployment
Unemployment has been chosen as the dependent variable. The data for the United Kingdom (UK) was found for the years 1980 to 2011. Data from the years 1970 to 1980 was found for all the variables except for Total government Gross Debt (%GDP). The following variables were chosen to analyse the correlation between the variables and the unemployment rate (%): (a) Employment (million) (b) Total government Net Lending/Borrowing (% of GDP) (c) Total government Gross Debt (%GDP) (d) Annual Average Inflation (%), and (e) GDP per capita USA$.
I thought it would be interesting to find out how the rate of unemployment interacted with the GDP so I chose the Total Government Gross Debt and the Total government Lending/Borrowing as a Percent of GDP and the GDP per capita because they are three variables that might have an obvious link to unemployment. Similarly I chose Inflation as an independent variable because inflation has a big impact on the economy of the country and therefore has an impact on unemployment. Total number of employed was chosen because of its relationship to unemployment.
Only the Total government net/lending borrowing was available for less than 40 years. The bulk of the data was retrieved from EconomyWatch.com which had the data from 1980 to 2011 for employment, unemployment and the total government lending/borrowing. The annual inflation rate data before 1970 to 2011 was retrieved from WatsonWyatt.com. The 1970 to 2011 data on total government gross debt as a percent of GDP was retrieved from UKPublicSpending.com. In data gaps were filled with data retrieved from Stats.oced.org.
Table 1 displays the data for unemployment and the variables from this period accessed from EconomyWatch.com, Stats.oced.org, WatsonWyatt.com, and Ukpublicspending.co.uk.
Data and Trends
The data are presented in graphically forms in Graph 1 through Graph 6.
Graph 1 presents the unemployment rate graphed against time. The graph demonstrates the two highest peaks (of high unemployment) from 1984 and 1993 which are also noted in Table 1. Unemployment rose steadily during the 70s from 4% to almoxt 12%. It fell slightly in the 80s and increased slightly in the 90s and then continally declined until the 2008 crisis.
The model parameters A, B, C, and D were estimated using a SOLVER optimization routine. The objective function was to minimize the Root Mean Square Error (RMSE) between the data and the model predictions subject to the values of the model parameters. Data from 1970 to 2005 were used to calibrate the model (Graph 7) and from 2006 to 2011 to verify the model (Graph 8).
The RMSE for the calibration period was 1.33 % (the model predicts the unemployment rate with an average error of 1.33%) and for the verification period 1.54%.
The values for the model parameters were
A (employment) = -3.52394, B (Inflation) = 0.051524,
C (GDP/capita) = 0.000516, D (Constant) = 89.88
In general the model worked very well. It predicted very well the change in rate of unemployment increase from 1970 to 1985. The model under- predicted the drop in unemployment from 1985 to 1990. The model then preformed quite well until the 2008 crisis. The points of error are not great, the difference in the data and model fit when not running in tangent is a difference of about 3 percentage points. When there are externalities such as the crisis of 2008 the model is not sensitive to these changes.
Unemployment is a challenging dependent variable to predict due to many factors affecting its variability. On the subject of the choice of independent variables used, they turned out to be very useful as variables in the model. My assumption that they would be useful in terms of understanding the relationship with unemployment and the economy turned out to be correct. Other variables that could account for these externalities should be considered such as the interest rate taken on loans, bank failures and lending power of the banks.
References
Economic Statistics. (2011). Economywatch.com Retrieved from .
OCED data on Employment. (2011). Stats.oecd.org. Retrieved from < http://stats.oecd.org/index.aspx?queryid=251>.
Statistics. (2011). WatsonWyatt.com Retrieved from <http://www.watsonwyatt.com/europe/pubs/statistics/render2.asp?ID=1.>.
1970 to 2011. (2011). UKPubicSpending.co.uk. Retreived from .
