Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
DOUBLE YOUR DONATION!
We don’t run corporate ads. We don’t shake our readers down for money every month or every quarter like some other sites out there. We provide our site for free to all, but the bandwidth we pay to do so doesn’t come cheap. A generous donor is matching all donations of $100 or more! So please donate now to double your punch!
FacebookTwitterGoogle+RedditEmail

Bad Projections: the Federal Reserve, the IMF and Unemployment

Those of us pushing the Federal Reserve Board to hold off on raising interest rates have pointed out that the members of the Fed’s Open Market Committee, like other economists, have repeatedly over-estimated the non-accelerating inflation rate of unemployment (NAIRU), the unemployment rate at which inflation would start spiraling upward. In 2014, they had put it at 5.4 percent. Today the unemployment rate stands at 4.1 percent, with no evidence of acceleration in the inflation rate.

If the Fed’s inflation hawks had their way, there would have been sharper increases in interest rates over the last four years. These would have slowed growth and prevented millions of workers from getting jobs and tens of millions from getting pay hikes. For this reason, we have argued for caution in raising rates until there is clear evidence that inflation is becoming a problem.

It turns out that the United States is not the only place where economists have trouble projecting floors to the unemployment rate. The figure below shows the IMF’s projection of unemployment rates from April of 2014 for the calendar year 2018. It also shows the most recent measure from the OECD.

Book2 31124 image001

Source: IMF and OECD.

In the vast majority of cases, the most recent month’s unemployment measure is well below the 2014 projection. For example, Belgium would have an unemployment rate of 8.3 percent in 2018. The most recent month’s data put the unemployment rate at 5.2 percent. For Germany, the projection was 5.2 percent unemployment; the most recent number was 3.5 percent. For the UK it projected 5.7 percent; the most recent number is 4.2 percent.

In some cases, the gaps are dramatic. The IMF projected an unemployment rate for of 5.5 percent for the Czech Republic; the actual rate is 2.4 percent. For the Slovak Republic, the projection was 12.2 percent; the actual figure is 7.5 percent. In the case of Spain, the projection was 22.6 percent; the most recent figure is 16.1 percent. On the whole, the average projected rate was 8.0 percent, the average current rate is 6.6 percent.

There are six countries in which the actual rate is worse than the projected rate. The actual rate in Finland is 0.9 percentage points higher than the 2014 projection. The rate in Italy is 1.2 percentage points higher. But, Greece is the big winner in this category. Its 20.8 percent unemployment rate is 4.5 percentage points higher than the 16.5 percent rate projected four years ago.

The moral of this story is that economists have a very bad track record in projecting unemployment rates. If a central bank wants to raise interest rates to head off inflation, it would be well-advised to look at what is happening to prices rather than relying on projections of NAIRUs. (The 2014 projections can be seen as NAIRU projections since the IMF assumed that the cyclical component of unemployment would be largely gone by that point.)

This column originally appeared on Beat the Press.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
October 19, 2018
Friday - Sunday
Jason Hirthler
The Pieties of the Liberal Class
Jeffrey St. Clair
A Day in My Life at CounterPunch
Paul Street
“Male Energy,” Authoritarian Whiteness and Creeping Fascism in the Age of Trump
Nick Pemberton
Reflections on Chomsky’s Voting Strategy: Why The Democratic Party Can’t Be Saved
John Davis
The Last History of the United States
Yigal Bronner
The Road to Khan al-Akhmar
Robert Hunziker
The Negan Syndrome
Andrew Levine
Democrats Ahead: Progressives Beware
Rannie Amiri
There is No “Proxy War” in Yemen
David Rosen
America’s Lost Souls: the 21st Century Lumpen-Proletariat?
Joseph Natoli
The Age of Misrepresentations
Ron Jacobs
History Is Not Kind
John Laforge
White House Radiation: Weakened Regulations Would Save Industry Billions
Ramzy Baroud
The UN ‘Sheriff’: Nikki Haley Elevated Israel, Damaged US Standing
Robert Fantina
Trump, Human Rights and the Middle East
Anthony Pahnke – Jim Goodman
NAFTA 2.0 Will Help Corporations More Than Farmers
Jill Richardson
Identity Crisis: Elizabeth Warren’s Claims Cherokee Heritage
Sam Husseini
The Most Strategic Midterm Race: Elder Challenges Hoyer
Maria Foscarinis – John Tharp
The Criminalization of Homelessness
Robert Fisk
The Story of the Armenian Legion: a Dark Tale of Anger and Revenge
Jacques R. Pauwels
Dinner With Marx in the House of the Swan
Dave Lindorff
US ‘Outrage’ over Slaying of US Residents Depends on the Nation Responsible
Ricardo Vaz
How Many Yemenis is a DC Pundit Worth?
Elliot Sperber
Build More Gardens, Phase out Cars
Chris Gilbert
In the Wake of Nepal’s Incomplete Revolution: Dispatch by a Far-Flung Bolivarian 
Muhammad Othman
Let Us Bray
Gerry Brown
Are Chinese Municipal $6 Trillion (40 Trillion Yuan) Hidden Debts Posing Titanic Risks?
Rev. William Alberts
Judge Kavanaugh’s Defenders Doth Protest Too Much
Ralph Nader
Unmasking Phony Values Campaigns by the Corporatists
Victor Grossman
A Big Rally and a Bavarian Vote
James Bovard
Groped at the Airport: Congress Must End TSA’s Sexual Assaults on Women
Jeff Roby
Florida After Hurricane Michael: the Sad State of the Unheeded Planner
Wim Laven
Intentional or Incompetence—Voter Suppression Where We Live
Bradley Kaye
The Policy of Policing
Wim Laven
The Catholic Church Fails Sexual Abuse Victims
Kevin Cashman
One Year After Hurricane Maria: Employment in Puerto Rico is Down by 26,000
Dr. Hakim Young
Nonviolent Afghans Bring a Breath of Fresh Air
Karl Grossman
Irving Like vs. Big Nuke
Dan Corjescu
The New Politics of Climate Change
John Carter
The Plight of the Pyrenees: the Abandoned Guard Dogs of the West
Ted Rall
Brett Kavanaugh and the Politics of Emotion-Shaming
Graham Peebles
Sharing is Key to a New Economic and Democratic Order
Ed Rampell
The Advocates
Louis Proyect
The Education Business
David Yearsley
Shock-and-Awe Inside Oracle Arena
FacebookTwitterGoogle+RedditEmail