Unemployment

By: Joseph Poveromo

The extreme levels of unemployment seen by the United States in 2020 and 2021 are over, and the country is left with, for the most part, a recovering economy. A unified effort between the federal, state, and local governments was able to revive economic activity and increase employment across the board. Since May 2020, Connecticut's unemployment has dropped from 11.4 percent

to 4.6 percent in March 2022, demonstrating an astonishing recovery and a huge employment growth. The spike in employment we see today is due to the massive shortage in labor the country was experiencing months ago. The labor market has adjusted accordingly, and Connecticut has been doing incredibly well with labor participation. Just one year ago, Connecticut’s seasonally adjusted unemployment rate was at 7 percent; this number now stands at only 4.6 percent, showing a 2.4 percentage point increase per year, and matching the US percentage increase; the U.S. has dropped the same amount from to 3.6 percent. The reasons for this drop in unemployment are twofold: correction from the labor shortage; and aggressive fiscal and monetary policy, both of which have put the United States on track to reach pre-pandemic levels. The labor market shortage experienced just months ago made for an interesting economic problem. Inflation was on the rise, due to government spending and supply chain constraints, but it was not out of control because the labor shortage made for an extremely minor money multiplier effect. These issues have been exacerbated by the Ukraine conflict and the increased money multiplier effect due to high unemployment. These issues directly contributed to the hike in inflation, and the employment rate is not helping. The Fed has expressed concern and is planning on an interest rate increase of at least 0.25 percent, but some experts suggest a 0.5 percent increase is on the way. Higher interest rates would certainly have a contractionary effect on the economy and slow inflation to a manageable level. However, one of the issues with this move is the supply side origin of the inflation we see today. Core inflation is at a solid level, but the issue is with food and energy, two items that have become quite scarce with the war in Ukraine and the supply chain crisis. Interest rate increases will have an effect, but not as much as we may hope. The trend for national unemployment has been going down, looking to stabilize around four to six percent based on the forecast done using R Studio. To forecast unemployment for the next three years the ensemble technique was used to get the most accurate forecast possible. The following forecasting models were used: error-trend-seasonal (ETS), autoregressive integrated moving average, neural network nonlinear autoregressive, seasonally adjusted seasonality, Box–Cox transformation, ARMA errors, trend and seasonal, and naïve. The most accurate of these models was the ETS model; therefore, this is the one used to forecast unemployment.The expected four to six percent level of stabilization is good to see because it shows the country is on its way to pre-pandemic unemployment levels.

Joseph Poveromo ’22

Major: Economics with a Philosophy and History Minor Hometown: Naugatuck, CT