Virginia Umemployment Analysis Essay, Research Paper

Introduction

The economic situation differs from country to country, caused by difference in population, geography, monetary system, political situation and a lot of other factors. But even within one country there are always a number of regions that differ from one another by their economic performance. This situation is especially true for big countries like US. If the regions are too broadly defined, the economic diversity would be lost. If the regions are too narrowly defined, they are not likely to have any viability as economic entities, and this circumstance will increase the problem of developing good regional economic data pertinent to the individual regions.

Economic indicators like income, employment and population may differ in the rural and urban areas of a single region, but the growth of the region still depends on the economic performance of the region as a whole, and especially the towns and cities.

An input-output model is very useful of measuring regional economic activity. Such a model effectively determines the impact of one economic variable on another can be used to analyze expected growth. The measure of regional economic indicators and comparing them to national could produce a good estimate of economic performance of a region.

The regional economic model in case of the region within US could be compared with the model of a small country. And national model could be seen as an aggregation of many interrelated regional models.

This paper includes an estimation of the regional economic model The model is an attempt to estimate possible relationship within economic indicators. This paper also presents an analysis of regional economic indicators and national economic indicators in order to compare economic performance of the region and national economy as a whole.

This model use annual national and state level data to produce regional estimates of income, employment, wages, population, labor force and the unemployment rate as a economic indicators for Virginia state as a region.

Previous studies

Regional scientists have long attempted to develop meaningful definitions and measures of economic diversity and diversification, and to establish functional relationships between diversity, diversification, and economic performance. The Regional economic models where (were) created to answer questions like “What is the relationship between a region’s changing economic structure and performance?.

Recent econometric models of regions were stressing macroeconomic relationship as a main idea of structuring of the model. A Number of models have been constructed for states and even smaller areas in order to find an effective forecasting tool linking the regional economic forecasting to the national economic forecast. Regional models were constructed as satellites to national models. Economic base theory views regional economic growth as being driven by exogenous final demands, notably exports. Input-output models are extensions of the economic base model, whereby intersectional economic relationships are explicitly considered Because of the underlying assumption that the regional economy is driven by exogenous final demands.

The idea of regional economic model that is (instead of “that is” say “used”) in this paper is based on two studies that present economic models of regions in US. One study, reports on a regional economic modeling approach used by East Kentucky Power Cooperative, Inc. (EKPC), a rural electric cooperative that serves 280,000 residential customers and 15,000 commercial customers in east-central Kentucky. These models use quarterly, county-level data to produce regional forecasts of income, employment, wages, population, labor force and the unemployment rate (1). Another study describes an economic model for state of Mississippi (2). Both studies indicated economic variables in regional output, labor, and income and wages blocks and estimated regressions on order(must be “in order”) to fine (must be “to find”) direction of dependence among variables. Both studies provide graphical interpretation of their models.

Data

Regional models often use data, which is allocated to the region, state or national level on the basis of employment, income or some other variable actually measured at the regional level. Such data may serve the needs of particular model specifications and produce forecasts of variables.

In this study, Virginia regional model uses a variety of national and regional data. The variables are summarized in (Appendix A). All variables were taken from University of Virginia Social Science Data Center (8).

Gross domestic product (GDP), the featured measure of U.S. output, is the market value of the goods and services produced by labor and property located in the United States. Because the labor and property are located in the United States, the suppliers (that is, the workers and, for property, the owners) may be either U.S. residents or residents of the rest of the world. So GDP was taken as an estimate of national Output, and it was measured in millions of Dollars. Growth State Product was taken as an estimate for Virginia State Output and it is presented in million of dollars.

Data for population in presented in number of persons both for Virginia and US.

Data for unemployment includes all full-time and part-time employment and is presented in number of persons.

Personal income includes wage and salary disbursements, other labor income, proprietors’ income with inventory valuation and capital consumption adjustments, rental income of persons with capital consumption adjustment, personal dividend income, personal interest income, and transfer payments to persons. It is presented in millions of dollars.

All data is a time series data for time period from 1975 to 1997 both for US (national) and Virginia (regional).

The problem with this data can arise because all data is inquiring with time and variables were regressed against closely related national.

Model Structure and specification

Economic model consists of output, labor, and income blocks. These blocks include economic indicators like regional output, population, employment, unemployment rate, wage and salary rate, and personal income.

The output block

Output of the region it a good estimate of business activity of the region. I could show how intensive the region is involved in creation growth domestic product. The output could be measured as a physical number of goods and services that are produced in the region. But because of difference in the commodities it is hard to combine them all together, so it is better to present the output as Growth Domestic Product, in this case Growth State product of Virginia.

Regional Output depends on National Output. Both outputs experience the same business cycle and increase in national output would stimulate regional economic growth, and the output of the region would increase.

Population is a good estimate of the demand for output. With an increase in population region will also experience increase in demand for goods and services. It gives an incentive for suppliers to produce more output. Population is also a supply of labor force that is a potential supply for new output.

US wage and salary rate could be treated as an expense of production and it could have negative influence on output, or in case if it is higher than regional rate, then more output would be produced elsewhere.

VaGSP = -211348.8 + 0.02 UsGDP + 0.045 VaPop – 1.5 UsW&S

(-3.24) (4.96) (3.11) (-1.6)

R=0.99 F=4675.87

National Output could be a good benchmark for Regional Output. Comparing two outputs the conclusion could made about regional performance. National output could present an estimate of the average performance of all states in general.

The figure of GDP is much bigger than Virginia?s GSP because it is a sum of all states’ GDPs together. With growing GDP, the growth rate of both variables will be a better basis for compression of regional and national output.

The growth rater of GDP and Virginia GSP are plotted in Graph 1

Graph 1

GDP and Virginia GSP Growth Rate 1975-1997

Graph 1 shows that GDP and GSP are following the same paten, they are cointegrated. Form 1981 to 1987 the growth rate of GSP is exceeding GDP, and in 1997 they are almost the same. This means that on average Virginia?s output is moving with national output, so it is developing as fast as US.

GDP depends on population and it will increase with increase in population, so when comparing GDP and GSP it will be useful to take Per Capita date, so it will be free of influence of difference in population. Per capita GDP and GSP are presented in Graph 2

Graph 2

Per Capita GDP and Virginia GSP 1975-1997

Per capita GDP and Per capita GSP increase over the time. In 1983 per capita Virginia?s GSP became higher that per capita GDP and it still is in 1997. Since 1983 Virginia Per Capita GSP is 4.54% on average higher than Per Capita GDP.

Labor market Block

Three concepts are presented in labor market block: regional unemployment rate, regional employment and population.

Population

Population of the region could play an important role in its development. Growth of population could stimulate economic activity, create new businesses and increase output or the region. Migration to a region can be an indicator of the region being more desirable to people in terms of standards of living.

Population of the region could change due to demographic factors like birth rate or death rate or economic factors like availability of job higher wages and higher standards of living. So population could depend on average regional wage, or in this case wage and salary rate (wage and salary per job) and unemployment rate.

VaPop = 4395645.4 + 83.08 VaW&S ? 18830.1 VaUnplR

(44.93) (39.73) (-1.35)

R=0.99 F=5656.6

As it was mentioned before, population of the region depends on some demographic factors along with economic. So the purpose of this equation is to try to explain reason for population to migrate from one region to another. People tend to move to regions where they have better economic conditions. In this case wage and salary rate has a positive affect on population, and unemployment rate – negative. People will choose to move to a place with higher wages (or because of higher wages), and bigger variety of available jobs (low unemployment).

To compare population growth of Virginia and US Graph 3 shows Population Growth rate for US and Virginia

Graph 3

US and Virginia Population Growth Rate 1975-1997

According to Graph 3 Virginia Population Growth rate mostly exceeds that of the US through the period from 1975 to 1997. And it is significantly higher during period of time 1984-1991 and is slightly higher in 1997

Employment

Employment is an important economic indicator. It shows the number of people that are engaged in production of regional output, people that are receiving income and paying taxes to the government.

The Employment equation is in a form of labor demand relationship, where labor demanded is a function of regional output. Employment is population of a region that encouraged in production or creation of regional output. This means that the number of jobs available (employment) depends on the region output. Growth State Product is taken as an estimate for total output of Virginia. So GSP determines demand for number of jobs (employment).

Employment of the region also depends on the wage rate of the region and how it stands comparing with national rate. The high wage and salary will attract people (both from inside and outside the region) to take a job.

If we take employment as an estimate of labor force than it should depend on population of the region, because labor force is a population of a certain age.

Vaempl = 1980348.6+5.59 VaGSP + 35.01 VaW&S

(25.01) (1.98) (1.43)

R=0.98, F=83612.36

When including population in this regression it showed a positive relationship but was not significant. Two other variables are significant at 85% level of significance, are positively related to employment. Increase of output stimulates an increase of demand for labor (increase in employment) and increase in wages and salaries stimulates more people to take a job.

Graph 4 shows the growth rates of Regional employment and National employment

Graph 4

US and Virginia Employment Growth Rate 1975-1997

Employment in Virginia is growing at a higher rate than in the US for the time period form 1982 to 1988. Over 20-year period of time regional and national employment growth rates are cointegrated.

It is also useful to know what is the ratio of employment to a total population of the region. This data is plotted in a Graph 5

Graph 5

US and Virginia Employment ? Population Ratio 1975-1997

The employment to population ratio is higher for Virginia. It means that higher percentage of population is employed in Virginia than in US on average.

Unemployment rate

Unemployment rate of the region is an indicator of the labor market performance. An increase of unemployment rate causes a decrease of employment and regional output.

The regional unemployment rate depends on national unemployment rate. The correlation coefficient between national and regional unemployment rate is 0.98. Regional economy experiences the same recessions and expansions as national does. So we should expect a positive relationship between national and regional unemployment rate.

If we take an employment as an estimation of number of jobs available in the region than employment can determine unemployment rate of the region. With more jobs available the rate of unemployment should decrease.

Population can also influence unemployment rate. If population is growing in faster rate that number of available jobs than unemployment rate would increase.

VaUnplR = -4.161 + 0.55 UsUnplR + 0.000002 VaPop ? 0.000003 VaEmpl

(-1.43) (5.08) (1.91) (-1.95)

R=0.83 F=30.55

Compressing of US and VA Unemployment rate is shown in Graph 6

Graph 6

US and Virginia Unemployment rate 1975-1997

Through 20-year period Virginia unemployment rate lower than US unemployment rate.

US and Virginia unemployment rates are moving together depending on economic situation in US.

Wage rate and personal Income Block

Wages & Salary

Wage and salary rates can estimate earnings of the region. Age and experience of regional workforce will influence wage and salary rate. So the average wage and salary rate can indicate the type and labor forth of the region.

The change in regional wage will be a subject to most of the same determinants as change in market wages. Regional wages and salary rates are related with national rate. The correlation coefficient is 0.99, so it means that wage rate of region is very sensitive to the wages of the country as a whole. An increase in the national wage rate would cause regional wage to go up because the change in regional and national rates are caused by the same factors like inflation or increase in output.

Regional wage and salary rate depends on Growth State Product. Wages and salaries are part of the GSP as and they are included as a cost of production, so if GSP increases it means that there will be more money to distribute to employees.

VaW&S = -554.48 + 0.944 UsW&S + 0.0089 VaGSP

(-2.58) (30.94) (2.58)

R=0.99 F=3744.6

US and Virginia wage and Salary rates are compared in a Graph 7

Graph 7

US and Virginia Wage and Salary Rate 1975-1997

The US Wage and Salary is higher than regional. Both variables increase with time but Virginia rate remains lower then US rate. This means that Virginia?s salaries and wages are lower than in US on average.

Income

The income of the region is a important factor of regional development, income is the money that can be spent on goods and services and is determining the demand for regional output, and increase in personal income can stimulate growth of regional economy.

Regional Income depends on employment of the region and regional wage and salary rate. Both these variable have a positive relationship with income. The more people are employed the more money population receives. The higher is wage and salary rate the population of a region is getting more money for their work.

VaInc = -67481.93 + 0.154 VaEmpl + 5.94 VaW&S

(-3.89) (1.54) (7.02)

R=0.99 F=1383.38

Growth rate of income US and Virginia is compared in Graph 8

Graph 8

US and Virginia Income Growth Rate 1975-1997

Income growth rate for Virginia and US are cointegrated. Until 1990 the Virginia Income growth rate was higher than that of the US. But after 1990 it is almost the same as the rest of country.

Per Capita income is an estimate of income available for each person in Virginia or US on average. Graph 9 shows regional and national per capita income.

Graph 9

US and Virginia Per Capita Income 1975-1997

Virginia Per Capita Income is higher than that of the US since 1983. This shows that there is more income on average for each person in Virginia than in US.

As it was maintained before Virginia?s wage and salary rate is lower than in US, but so does unemployment rate. The lower Unemployment rate stimulates high per capita income, even with low wage and salary rate.

Graphic description of Virginia regional model is presented in Appendix B

Analysis

Virginia is a region of fast growing economic activities and development. Virginia offers a number of advantages for business. The state is centrally located on the Eastern Seaboard

Effective economic development depends on elements with which Virginia is richly endowed. Location is one of them. Over 50% of the total U.S. population is within 500 miles of Richmond, Virginia’s capital.

As a measure of its economic stability, Virginia balanced its latest budget without raising taxes, one of only two states to do so according to Financial World magazine, and was recognized by that publication as the nation’s best managed state.

Development of the region runs on infrastructure, and in this category, Virginia boasts nearly 1,100 miles of highways, 3,300 miles of rail Roads, and Dulles International Airport. The daily confluence of goods and services across this network paints a portrait of economic development at its most sophisticated level.

Nowhere is this more apparent than at Hampton Roads, the country’s largest natural deep-water port that in 1991 accounted for 73 million tons of foreign trade — a figure that is still growing.

The education institutions are very developed in Virginia. Virginia has 84 institutions of higher learning. Twenty-three of these are community colleges on 34 sites offering training in the business discipline as well as advanced vocational training. In 1991, more than 2,600 students in Virginia’s colleges and universities earned degrees in the field of engineering — creating a talent pool essential to nation’s high-tech future.

The overall performance of Virginia? economic indicators is shown in Table 1

Table 1

Economic IndicatorGeneral statePeriod when higher than US indicator

Output Growth rate Average1980-1988

Per Capita OutputAverage1984-1997

Population GrowthHigher than average1983-1997

Employment growth rate Average1982-1988

Unemployment rateLow–

Wage and salary rateLow–

Income Growth rate Average 1980-1989

Per Capita IncomeAverage1982-1997

As can seen for Table 1 period form 1980-1990 can be characterized as a period of fast economic growth. In this period economic indicators of Virginia were higher that in the US. After 1990 there is some decrease in economic development of the region.

This decrease in economic activates could be explained by some specialization of state of Virginia.

One out of five jobs in Virginia is a civilian government position. Though federal civilian employment has been in a steady decreasing since 1992, rising state and local government employment has offset these losses. In 1997 and 1998, civilian government employment in Virginia will actually experience a net growth of about 1 percent, the report predicted

Virginia’s economy depends heavily on its defense industries. Though period 1980-1990 the defense industry was in prosperity, a lot of money was invested during presidency of R. Raygan and period of Cold War. Since 1990 Virginia had experienced few rounds of defense cuts that influenced the economic situation of the region.

But there are some efficient state conversion program is helping to prepare for coming defense spending cutbacks. With its concentration on electronics and shipbuilding, Virginia has been spared the first round of defense.

The Virginia plans to soften the blow of defense. The good example of this is Northern Virginia aria. It is the most developed part of Virginia. Companies in telecommunications; Internet applications; systems development, integration and implementation; and the chemical and biomedical industries have all either relocated or created offices in Northern Virginia. The area is also home to nonprofit agencies and, of course, government agencies.

Conclusion

Economic situation of the region can differ from national depending on performance of regional economic indicators. The economic factors that can economic performance of the region that were presented in this paper are Regional Output, Population, Employment, Unemployment rate, Wage and Salary rate, and Personal Income. These economic factors are the main variables of regional economic model that presented in this paper. Appendix B is the graphic interpretation of the mode. It gives the idea of relationships that exists in among variables. One of the most impotent economic indicators of the model is output of the region. It determines the demand for labor in the region and it is the main source of income for population. So the high regional output generally implies the high economic performance of the region.

In order to make conclusions about the level of performance of the region it is useful to compare it with national economic performance. In this paper Virginia state economic indicator were compared to US. The Virginia performance could be caricaturized as an average relative to US. Virginia?s advantage is that Unemployment in this state is lower than in US. Wage and Salary rates is slightly lower than in US, but Per capita Income still increases average Per capita Income of US. For some period of time (1980-1990) Virginia Economy was booming: all economic indicators showed better performance of the region. This could be explained by increase in government expenditures on defense industry (the significant of economy of Virginia) in 1980?s. The decrease in economic activity of Virginia began with defense spending cutbacks in 90?s. But this situation is changing now because of new arias with developing high technology industries and business sectors like Northern Virginia.

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2. F Gerard Adams, Carl G. Brooking, Norman J. Glickman: On the Specification and Simulation of Regonal Ecometric Model: A Model of Mississippi. The Review of Economics and Statistics, Aug, 1975

3. Paul B. Siegel, Thomas G. Johnson, Jeffrey Alwang: Regional economics and diversification.

4. Bureau of Census: http://www.census.gov

5. Bureau of Economic Analysis: http://www.bea.doc.gov

6. Bureau of labor Statistics: http://www.bls.gov

7. FedStats: http://www.fedstats.gov

8. University of Virginia Social Science Data Center: http://fisher.lib.virginia.edu/

9. Virginia (special advertising supplement) Forbes, Dec 7 1992

10. Kim Fulcher Linkins: Virginia’s New Dominion: Northern Virginia’s Silicon Dominion is home to high-tech firms that offer work in every facet of IT. Computerworld, August 16, 1999

11. Richard Meyer: Of swords and plowshares: how Virginia plans to soften the blow of defense cutbacks on its economy. Financial World, June 8, 1993