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Friday, April 02, 2004

I'm not a forecaster but I play one on t.v.

Yesterday around noon UTA's media relations department invited us economists to make a forecast about today's labor market report. My first inclination in these cases is to dismiss them as frivolous and misapplications of economists' time and efforts. However, after a few moments of reflection I decided to take a "stab" at predicting unemployment - having no expertise in the area - and to use the opportunity to make a statement about factor productivity and why employment is a lagging indicator.

I then had to decide how to make my prediction. I didn't have time to set up a large sample of time series data on unemployment, estimate ARIMA models, perhaps a few Vector Autoregression models and look at impulse response functions, so I needed an alternative approach. I spent about twenty seconds deciding whether I could get away with the cynical prediction that unemployment would either go up, go down, or stay the same, but dismissed the idea. Finally, I decided to calculate the averages of unemployment and employment gains over the past decade (data from BLS) and use reversion to the mean as the decision rule. This led me to predict unemployment at 5.5% and job increases somewhere around 150,000.

Turned out I was wrong. Oh well, off by two percentage points in the unemployment figure and off about 150,000 in the new jobs area. Most people might think that that is a pretty good prediction (hell, weathermen keep their jobs after worse predictions), but in economics forcasting the mistake, especially in the jobs area, is intolerable. Therefore, this round my back of the envelope approach failed miserably this time. Good thing my prediction didn't have any money riding on it. Perhaps I will have better luck next time? After all, eventually the unemployment rate will once again be 5.5% at the same time that new jobs total 150,000 - right?

Anyway, below I post my "prediction" from yesterday.

Hope this helps.

>At 11:05 AM 4/1/2004 -0600, you wrote:
>I am seeking advance comment from academic and corporate economists (and
>others) on the expectations for the employment report on Friday.
>Will the payroll number be significantly up? What unemployment rate will the U.S. post for March?
>And what economic factors are driving the labor market? Respond via e-mail for quotation.
>Need leads by 03:00 PM US/Central APR 01

The recent rates of economic growth in the United States are expected to eventually translate into increased hiring in the private sector. Recent trends indicate that seasonally adjusted employment levels are increasing somewhat modestly and this trend is expected to continue throughout the summer months. Expectations of millions of jobs created overnight are simply not realistic. Over the past ten years, average per-month employment has increased approximately 140,000 - in recent months employment gains have slightly exceeded this ten year average.

Given recent trends, the unemployment rate would not be expected to decrease dramatically this month, perhaps to 5.5%, which is slightly higher than the 5.12% average over the past ten years, which included the dramatic increase in employment caused in part by the Internet revolution.

The labor market is primarily driven by two factors, labor productivity and expected demand
for a firm's products. Economic gains over the past fifteen months seem to have been caused primarily by increased
labor productivity, which precludes the necessity of hiring additional full-time workers. Instead of hiring
additional employees, which is a costly option for firms, already
employed individuals may be asked to work overtime in the short run, thereby increasing output without
increasing employment. However, there is a limit to how much currently employed individuals can produce. If
firms discover that the demand for their product is consistently greater than that which their current workforce
can produce, firms will hire additional workers. This is why employment is a what is called a
lagging indicator.

Craig Depken
Associate Professor of Economics

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