I asked the other day about research that addresses the link between the trade deficit and unemployment rates. My guess is that it has been studied quite a bit, with probably alot of papers on it.
But I tried something myself anyway.
I ran a regression in which the yearly percentage point change in the unemployment rate was the dependent variable (UE). The independent variables were
BAL = the yearly percentage point change in the trade balance (as a percentage of GDP). For example, in 2000 it was -3.8% and in 1999 it was -2.8%. So for 2000, the change was -1.0.
LF = the yearly percentage point change in the labor force participation rate.
PR = the yearly percentage change in productivity.
GDP = the yearly percentage change in the real per capita GDP (with the labor force used instead of the population).
The OLS regression equation was
UE = .40 + .36*BAL + .12*LF - .92*PR - .36*GDP
The r-squared was .84 and the stadard error was .40
The t-values were
BAL 2.63
LF 2.74
PR -3.67
GDP -11.09
So holding the other factors constant, as the yearly percentage point change in the trade balance gets more positive (negative), the yearly percentage point change in the unemployment rate gets bigger (smaller). This says that as we get bigger trades deficits, the lower the unemployment rate (at least compared to the previous year).
It looks like as the labor force participation rate rises, the unemployment rate goes up, ceteris paribus. But the bigger the productivity improvement, the lower the unemployment rate. I expected the opposite. I thought that if productivity goes up, firms could increase output without adding workers. And of course, the bigger the increase in GDP, the lower the unemployment rate.
So if GDP goes up 4.0%, then the unemployment rate would fall 1.42 percentage points. If the trade balance gets 1.0 percentage points more negative, then the unemployment rate would fall .36 percentage points. If productivity rises 3.0%, then the unemployment rate would fall 2.75% points. If the labor force participation rate rise 1.0 percentage points, unemployment would rise .12 percentage points.
There may be time series issues like serial correlation which I have not tested for. There may also be other factors like minimum wage laws, regulations, etc that might affect this.
Comments welcome.
Cyril Morong
