A Mini MacroEconometer for the Good, the Bad and the Ugly

Ali
Posted on Nov 27, 2020

 

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's/state’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s/state’s economic health. But, is this wealth and economic health distributed in a manner that can reduce the poverty and narrow the gap between the rich and the poor?

Early each month, the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor announces the total number of employed and unemployed people in the United States for the previous month, along with many characteristics about them. These figures, particularly the unemployment rate—which tells us the percentage of the labor force that is unemployed—receive wide coverage in the media. Because unemployment insurance records relate only to people who have applied for such benefits, and since it is impractical to count every unemployed person each month, the government conducts a monthly survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country [1].

The Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family's total income is less than the family's threshold, then that family and every individual in it is considered in poverty. The official poverty thresholds do not vary geographically, but they are updated for inflation using the Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and does not include capital gains or non-cash benefits (such as public housing, Medicaid, and food stamps) [2].

In this project, I’ve been looking at the GDP, unemployment rate and percentage of people in poverty among all the states in the time period of 2001-2018 to see if there is a meaningful relationship between these three parameters.

there are several popular variations of GDP measurements which can be useful for different purposes. Here, we use Real GDP which is an inflation-adjusted measure (in our dataset based on 2012 $) that reflects the quantity of goods and services produced by an economy in a given year, with prices held constant from year to year in order to separate out the impact of inflation or deflation from the trend in output over time.

Wealthy States

There are some states which are certainly doing better than the rest according to their GDP numbers. Massachusetts, Connecticut, Alaska, Delaware and New York keep their place in the top ten from 2001-2018 (Fig.1).

Fig. 1

Massachusetts’s economic success is both a product and an effect of possessing the nation's most educated workforce along with the close clustering of research institutions and businesses in STEM sectors, makes for a bustling incubator of innovation and investment. For New York, The financial services sector is the most important area of the state. Professional and business services such as legal advice, administrative services, and management consulting have a big share as well. In addition to Wall Street, New York is steadily growing its technology and entrepreneurship presence. Finance, insurance, real estate, rental, and leasing are the most important areas of Connecticut's economy. The state's economic growth is also tied to manufacturing activity; United Technologies Corporation is based in Connecticut. Alaska’s high GDP per capita is due to its small population and its high production output of petroleum, natural gas, coal, gold, zinc, and other precious metals. Other prominent export goods from Alaska include seafood products, such as salmon and cod. Delaware has a reputation as one of the best places in the country for publicly traded American companies to incorporate, largely because of its business-friendly corporate tax laws. More than 50% of publicly traded American companies are incorporated in the state, including 63% of the Fortune 500. Combined with low labor costs, total business costs in the state are 21% below the U.S. average, among the lowest in the country [3].

Frozen, unemployed and rich !?

Among all the states, Alaska certainly is an interesting case. Over the time period of 2001-2018, The state GDP is among the top ten, the percentage of people in poverty is low has a high unemployment rate. (Fig. 2)

Fig. 2

A big portion of Alaska’s jobs are seasonal and only occurs in summer. This includes tourism, commercial fishing, firefighting, and others. These seasonal jobs can create large fluctuation in Alaska’s monthly unemployment data and play a role in pushing up the average unemployment. There are few large centers of wage employment in Alaska — Anchorage, Fairbanks, Juneau and a few others, plus the North Slope oil industry, whose workers are mainly commuters from other states. As a result, much of the economy of Alaska is informal which doesn’t make its way to surveys and statistics.Like all statistics, macroeconomic indicators work best when there is a large population. The other cause is the small population of Alaska which makes the weight of each data point is exaggerated.[4]

GDP, Unemployment and Poverty

It is a view in economics that the growth rate of the GDP of an economy increases employment and reduces unemployment. This theoretical proposition relating output and unemployment is called “Okun’s Law”. However, Okun reported a negative short-run correlation between unemployment which doesn’t necessarily hold up for longer term analysis. The correlation coefficients for our three key economic parameters are shown in Fig.3.

Fig. 3

As we can see in the Fig.3, there isn’t any unified pattern for the correlation between GDP growth rate and percentage of the people in poverty and their correlation varies for different states. It’s interesting to see that for a state like Pennsylvania, the GDP growth and poverty moves in the same direction which can potentially create even larger economical and financial injustice.

The case is slightly better for the relation between GDP growth and unemployment rate. Which shows a negative correlation for most of the states up to the maximum absolute value of 0.89 for Michigan (Fig. 4).

In contrast with the two previous cases; Unemployment rate and poverty percentage show a unified pattern which for more than half of the states shows the correlation values between 0.5-0.91 in which California has the highest value (Fig. 4).

Fig. 4

In summary, although GDP shows the direction that the economy is moving towards, it doesn’t guarantee that all the individuals will share the prosperity in the same way. To fight poverty, the economic policies should focus on reducing the unemployment rate to make sure that the financial and economical gap between the rich and the poor is narrowed, and we are on the route to financial justice.

 

References

[1] www.bls.gov

[2] www.census.gov

[3] www.investopedia.com

[4] www.kingeconomicsgroup.com

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