Question

a) Find the time series data (quarterly or monthly) on the unemployment rate, inflation rate and real GDP growth in the U.S. from 1980 to 2005, and discuss whether the Okun’s Law is valid or not. Then, discuss whether the Phillips curve exists in the U.S. economy (you have to report your data source and or the website).

b) Which recession is most severe in terms of its depth and the duration of unemployment?

c) Why unemployment rises when the economic is recovering? what kinds of unemployment is it ?

Answer 1

a) Okun’s law is an empirical observed relationship between unemployment and losses in the production of a nation. It states that for every 1% increase in the unemployment rate, a country’s FDP would be almost 2% lower than its actual levels. With reference to the world bank data on the unemployment and GDP growth rate in the US economy, the following analysis can be obtained

· The GDP growth rates in the US economy, in accordance with the World Bank data has seemingly followed a magical pattern. It has witnessed a negative or very low growth rate during the starting of every decade, reaching to higher levels during the mis decades and lowering again thereafter. It is attributed to the recession that the country has faced at the start of every decade.

· On the other hand, when the unemployment rates are analysed, it can be seen that it has followed the Okun’s law strictly at the times of recessions and Desert storm of 1990, but the trend has not been static.

· At many times, GDP growth rate and the unemployment rates are following an inverse pattern which forms the basis of Okun’s but it has not met the same at other instances thereby disproving the Okun’s law.

                                                   Phillips curve gives the relationship between unemployment and inflation rates and states that they follow an inverse pattern. On the analysis of the inflation rate of the US from 1960’s the relationship it has with unemployment has mostly followed the Phillip’s curve pattern. As complemented in the Oku’s law analysis, the Phillips pattern has also followed almost the same path, wherein the distinction that proves the validity of a Phillips curve is clearly seen at the beginning of a decade, where it has been hit by recessions and natural calamities. Thus it can be said that the Phillips curve holds for the US economy in general, but it has variations in the same at many instants.

Reference: World Banks statistics on US inflation, unemployment and GDP growth rates from 1960 to 2005

b) A recession, in economics refers to a contraction in the business cycle of an economy which results in the general decline of all the economic activities in the state. They are generally outcomes of widespread falls in spending in an economy, triggered by acute financial crisis, external trade shocks, internal supply side shocks or even as a result of a national disaster. Usually, the governments follow an expansionary macroeconomic policy to overcome the menace caused by recession patterns.

                                    In general, a recession always accompanies unemployment rise. The negative GDP gap during a recession almost gives the difference between the actual unemployment patterns and the unemployment patterns of a state during recession. The analysis of recession in Britain reveals that it took almost 5 years after the recession for the unemployment patterns to reach the original levels. From the historical analysis it can be understood that the highest unemployment rate followed the Great depression that hot the world in the 1930’s. The unemployment rate in the Us was almost 25%, which till date remains the highest levels that the unemployment patterns have reached. It took almost 30-40 years for it to come down to single digits.

c) Unemployment and economy always co-exists. When the economy falls, unemployment rises and vice versa. They always forms an inverse relationship. But there is always a situation in the economy, where the unemployment seems to be lower at times when the economy is trying to recover. The reason for this is the instability of the economic structure during recovery times. During a recovery, the major focus of the economy would be to recapture the lost stability at the earliest. Hence, all the manufacturers and factors that forms the part of production network are forced to work at the minimum efforts to achieve maximising profits and as a part of it, the employee strength would be curtailed which would be back to normal strength only after the economy has recovered to its full strength. This forms a part of the Cyclical Unemployment pattern which is caused by the ups and downs of the economic structure.