A year ago, we
described the evolution of unemployment in Spain using the LSQ technique as
applied to the integral version of Okun’s law:

*u(t) = u(t*(1)

_{0}) + bln[G/G_{0}] + a(t-t_{0})

where

*u(t)*is the rate of unemployment at time*t*,*G*is the*level of real GDP per capita (we used TED, Conference Board, EKS PPP ),**a*and*b*are empirical coefficients. The best-fit (dynamic) model for Spain minimizing the RMS error of the cumulative model (1) is as follows:*du = -*0.406

*dlnG +*2.00

*, t<*1995

*du = -*1.11

*dlnG +*1.54

*, t>*1994 (2)

This model suggests a big shift in the
slope and a smaller change in the intercept around 1995. Having a new unemployment
estimate for 2011, we have updated Figure 1 (original
Figure 1) from our previous post and confirmed the excellent predictive power
of the model. The predicted value is 21.4% and that borrowed from the U.S. BLS is
21.8%.

Figure 1 also shows a prediction (red
circle) of the unemployment rate in Spain in case of a 10% fall in real GDP per
capita in 2013. The current economic performance in Spain is awful and some
experts see a GDP fall of 25%. We are scared to publish the number for the fall
by a quarter of the current GDP level since even a 10% fall will result in a
33% rate of unemployment. Essentially a one third of labor force will be
unemployed. Unfortunately, even a zero GDP
growth rate will result in a 1.5% increase in unemployment (see eq. 2).

Figure 1. The observed and predicted rate of
unemployment in the Spain between 1971 and 2011.

In 2013, the rate may reach 33% in case
of 10% fall in real GDP.

The cumulative form of the dynamic Okun’s
law is characterized by standard error of 1.68% for the period between 1971 and
2011 (0.92% after 1995). The average rate of unemployment for the same period
is 13.6% (14.6% after 1995) with a standard deviation of the annual increment
of 2.12%.

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