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A year ago, we described the evolution of unemployment in Spain using the LSQ technique as applied to the integral version of Okun's law:

u(t) = u(t0) + bln[G/G0] + a(t-t0) (1)

where u(t) is the rate of unemployment at time t, G is the level of real GDP per capita (we used TED, Conference Board, EKS PPP), a and b are empirical coefficients. The best-fit (dynamic) model for Spain minimizing the RMS error of the cumulative model (1) is as follows:

du = -0.406dlnG + 2.00, t<1995

du = -1.11dlnG + 1.54, t>1994 (2)

This model suggests a big shift in the slope and a smaller change in the intercept around 1995. Having a new unemployment estimate for 2011, we have updated Figure 1 (original Figure 1) from our previous post and confirmed the excellent predictive power of the model. The predicted value is 21.4% and that borrowed from the U.S. BLS is 21.8%.

Figure 1 also shows a prediction (red circle) of the unemployment rate in Spain in case of a 10% fall in real GDP per capita in 2013. The current economic performance in Spain is awful and some experts see a GDP fall of 25%. We are scared to publish the number for the fall by a quarter of the current GDP level since even a 10% fall will result in a 33% rate of unemployment. Essentially one third of labor force will be unemployed. Unfortunately, even a zero GDP growth rate will result in a 1.5% increase in unemployment (see eq. 2).

(click to enlarge)

Figure 1. The observed and predicted rate of unemployment in Spain between 1971 and 2011.

In 2013, the rate may reach 33% in case of 10% fall in real GDP.

The cumulative form of the dynamic Okun's law is characterized by standard error of 1.68% for the period between 1971 and 2011 (0.92% after 1995). The average rate of unemployment for the same period is 13.6% (14.6% after 1995) with a standard deviation of the annual increment of 2.12%.

Source: Unemployment In Spain May Reach 33% In 2013