Wednesday, January 11, 2012

Okun's Law applied to the eurozone unemployment rate

The general consensus now seems to be that the eurozone is entering a recession, though economists disagree on the duration and severity. One can now ask the question about how bad the euro area unemployment is expected to get. JPMorgan is attempting to estimate the unemployment rate using the so called Okun's Law. The law is an empirically based linear relationship between the GDP growth and the unemployment rate (although some have modeled it using a quadratic fit.)

JPMorgan's forecast has the Okun's Law based unemployment rate above 11%, easily exceeding the peak rate in the US.

Eurozone unemployment rate (%, source: JPMorgan)
This means that according to the forecast, the US and the eurozone unemployment rates will continue to diverge.

US vs. eurozone unemployment rate forecast (%, source: JPMorgan)