Output and Unemployment Gap

I wanted to conduct a study to see whether Output and Unemployment were correlated.


This graph is a representation of the Output gap (Output – Potential Output) and the Unemployment Gap (Unemployment Rate – Natural Rate of Unemp.) From this graph I can guess that these two are negatively correlated.

I then ran a regression to find out how well this model is described by each other with OutputGap as the dependent variable and UnemploymentGap as the independent Variable. This is the regression I got:


Regression Statistics
Multiple R 0.906616629
R Square 0.821953712
Adjusted R Square 0.82129913
Standard Error 1.002754174
Observations 274
df SS MS F Significance F
Regression 1 1262.618932 1262.618932 1255.692615 6.2946E-104
Residual 272 273.5003339 1.005515934
Total 273 1536.119266
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.29633505 0.061534508 -4.815753949 2.43757E-06 -0.417479503 -0.175190597 -0.417479503 -0.175190597
X Variable 1 -1.433866901 0.040463847 -35.43575335 6.2946E-104 -1.513529042 -1.354204761 -1.513529042 -1.354204761

The goodness of fit of this regression is 82.195%. The intercept is -0.296 with the slope decreasing at a rate of 1.4338.


From this research we can conclude that holding all else constant, if unemployment rate increases, output will decrease. Vice Versa, if unemployment rate decreases, output will increase.

Although this is true, it is impossible for the unemployment rate to be 0% as there will always be people looking for work in the United States. It is something to not that, today the Unemployment rate is below the Natural Level, which is usually around 5% and output has been on the rise.

** Data Sources: Fred St. Louis



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