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Inflation, unemployment, labor force change in the USA

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  • Ivan O. Kitov

    ()
    (Russian Academy of Sciences)

Abstract

of personal income distribution normalized to the total nominal GDP. Inflation is found to be a mechanism, which counters changes in the relative incomes induced by economic growth and population changes - both in number and age structure. A model is developed linking the measured inflation (consumer price index or GDP deflator), unemployment and change in labor force. During the last twenty-five years, unemployment in the USA has been a lagged linear function of inflation. In turn, inflation has also been a lagged linear function of relative change in labor force with time. The lag is currently three years. Only a small decrease in labor force participation rate is currently observed in contrast to a strong increase between 1965 and 1990. According to the indicated relationship, the well-known stagflation period clearly resulted from the lag: the sharp increase in inflation coincided in time with the high unemployment induced by the high inflation period two years before. One can predict the unemployment rate in the USA in the following two years within the accuracy of inflation measurements. For example, the end of 2005 is a pivot point from a period of decreasing unemployment to one of moderate growth from 5% in 2005 to 6% in the middle of 2008. Starting in 1960, cumulative values of the observed and the model predicted unemployment are in agreement with the lag between inflation and unemployment. Inflation is defined by a lagged linear function of rate of change in labor force. The observed and predicted inflation almost coincide for the last forty years of annual measurement values, smoothed by a five-year wide moving window curves and as cumulative curves as well. Deviation of the curves before 1960 can be explained by a degraded accuracy of the measurements. A severe decrease in the rate of change of labor force is expected after 2010. This drop can potentially induce a long-term deflationary period. The same effect has been observed for Japan starting in 1990. There are numerous implications of the results for monetary and social policy-makers. The most important is an absence of any means to control inflation and economic growth except though a reasonable labor policy. In addition, some urgent measures are necessary to prevent the start of a deflationary period in 2010-2012.

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File URL: http://www.ecineq.org/milano/WP/ECINEQ2006-28.pdf
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Bibliographic Info

Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 28.

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Length: 36 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:inq:inqwps:ecineq2006-28

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Web page: http://www.ecineq.org
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Keywords: inflation; unemployment; labor force; USA; time series models;

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References

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  1. Ivan O. Kitov, 2006. "GDP growth rate and population," Working Papers 42, ECINEQ, Society for the Study of Economic Inequality.
  2. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 115-136, Fall.
  3. repec:ebl:ecbull:v:28:y:2005:i:9:p:a0 is not listed on IDEAS
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Citations

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Cited by:
  1. Kitov, Ivan & Kitov, Oleg, 2009. "A fair price for motor fuel in the United States," MPRA Paper 15039, University Library of Munich, Germany.
  2. Ivan, Kitov, 2006. "Exact prediction of inflation in the USA," MPRA Paper 2735, University Library of Munich, Germany.
  3. Kitov, Oleg & Kitov, Ivan, 2011. "Inflation and unemployment in Switzerland: from 1970 to 2050," MPRA Paper 28887, University Library of Munich, Germany.
  4. Kitov, Ivan, 2009. "Predicting gold ores price," MPRA Paper 15873, University Library of Munich, Germany.
  5. Kitov, Ivan, 2006. "The Japanese economy," MPRA Paper 2737, University Library of Munich, Germany.
  6. Ivan O. Kitov & Oleg I. Kitov & Svetlana A. Dolinskaya, 2008. "Relationship between inflation, unemployment and labor force change rate in France: cointegration test," Papers 0811.0896, arXiv.org.
  7. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Japan," MPRA Paper 5464, University Library of Munich, Germany.
  8. Ivan O. Kitov, 2010. "Inflation and unemployment in Japan: from 1980 to 2050," Papers 1002.0277, arXiv.org.
  9. Ivan Kitov, 2007. "Inflation, Unemployment, Labor Force Change in European Counties," Mechonomics mechonomics7, Socionet.
  10. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Germany," MPRA Paper 5088, University Library of Munich, Germany.
  11. Kitov, Ivan, 2009. "Predicting the price index for jewelry and jewelry products: 2009 to 2016," MPRA Paper 15875, University Library of Munich, Germany.
  12. Kitov, Ivan & Kitov, Oleg, 2009. "PPI of durable and nondurable goods: 1985-2016," MPRA Paper 15874, University Library of Munich, Germany.
  13. Ivan Kitov & Oleg Kitov & Svetlana Dolinskaya, 2007. "Linear Lagged Relationship Between Inflation, Unemployment and Labor Force Change Rate in France: Cointegration Test," Mechonomics mechonomics2, Socionet.

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