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Unformatted text preview: I. Problem 1 1. Data for Unemployment Rate and Output per Worker: Unemployment and Output per Worker-0.06-0.04-0.02 0.02 0.04 0.06 1950 1960 1970 1980 1990 2000 2010 Time Rate Output per Worker Unemployment Rate The data indicates that when the unemployment rate is high, the output per worker is low (c. 1960 and 1985). Similarly, when the unemployment rate is low, the output per worker is high (c.1972). Thus, unemployment rate and output per worker (a measure of productivity) are negatively correlated. 2. Furthermore, because the peaks and valleys of the unemployment rate curve are staggered somewhat behind those of the output per worker curve, the data indicates that output per worker is leading the cycle in unemployment. 3. The unemployment rate curve appears to be more level and far less erratic. The numerous, precipitous changes in the output per worker curve mean that decreases are less likely to be followed by decreases and vice versa. Therefore, the unemployment rate is the more persistent variable. 4. Model data for unemployment rate and output per worker: Unemployment and Output per Worker-0.06-0.05-0.04-0.03-0.02-0.01 0.01 0.02 0.03 0.04 0.05 50 100 150 200 250 Time Rate Output per Worker Unemployment Rate Because peaks of output per worker roughly correspond to valleys of unemployment rate and vice versa, the model correctly predicts the negative correlation between the two variables. 5. Since movements in the two variables do not appear to be substantively or consistently staggered, the two variables seem to be coincident in the model. This is different from the real data, which indicates that output per worker leads unemployment rate. I am unsure as to how the model is constructed, but I would guess that it does not assume any lag in the variables (necessary for producers to recognize productivity changes) which accounts for the disparity with reality. 6. The unemployment rate has numerous plateaus and is therefore far less persistent. This, once again, diverges from the data. Here, the main issue seems to be that the productivity is modeled so regularly (whereas it is extremely irregular in the real data). Also, the unemployment rate is more inclined to plateau behavior which is not observed in the real data. Perhaps the model does not account for the continuum of productivity growth-employment changes that the real market does. Furthermore, the fact that unemployment decreases quickly and substantially in booms gives some further hint to this (as the boom is entered, the employment market adjusts rapidly to bring the unemployment rate close to the natural rate and as a recession is entered, the employment market adjusts rapidly to bring hiring down to a minimum; after these adjustments hiring continues at a constant rate). The problem is that firms are generally disinclined to hire and fire workers so rapidly because of the associated expenses. This is the origin of the models divergence from reality....
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