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:
|Adjusted R Square||0.82129913|
|Coefficients||Standard Error||t Stat||P-value||Lower 95%||Upper 95%||Lower 95.0%||Upper 95.0%|
|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