Political Party & Unemployment

Group 5:

Richard Baker, Michael Jelmini, Kenneth Morino,

Cambria Price, You Ren, James Young

Econ 240A

Professor Llad Phillips

Objective

Why?• Upcoming graduation

• Recent recession

• Recent increase in unemployment

What?• Is there a correlation between unemployment and presidential party

affiliation?

How?• Time series data of national unemployment rate

• Bernoulli distribution of party affiliation

Hypothesis

H0 : When a republican is in presidential office,

the unemployment rate is higher than when a democrat is in office.

Ha : There is no correlation between the political

affiliation of the president and the unemployment rate.

Collected Data

• Unemployment Data from 1947-2002-Bureau of Labor Statistics

http://stats.bls.gov

• Presidential Party Affiliations-The White House

http://www.whitehouse.gov/history/presidents

Meet the Presidents

Presidential Party Affiliation

Time Series Data of Unemployment Rates

Unemployed Percent of Labor Force vs Year

0

2

4

6

8

10

12

1947 1957 1967 1977 1987 1997

Year

Un

emp

loye

d P

erce

nt

of

Lab

or

Fo

rce

Unemployment vs Presidential Party Affiliation

0

2

4

6

8

10

12

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

Year

Une

mpl

oym

ent (

%)

Democrat

Republican

Probability of Democrat Given Unemployment Rate

y = -0.1175x + 1.1041

R2 = 0.128

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

0 2 4 6 8 10 12

Unemployment Rate (%)

Pro

bab

ilit

y P

resi

den

t is

Dem

ocr

at

Data Points

Linear Model

Linear Probability Model

Regression Results

Dependent Variable: DEMOCRAT Method: Least Squares Date: 11/20/03 Time: 14:34 Sample: 1947 2002 Included observations: 56

Variable Coefficient Std. Error t-Statistic Prob.

UNEMPLOYMENT -0.117549 0.041758 -2.815034 0.0068 C 1.104073 0.242009 4.562109 0.0000

R-squared 0.127969 Mean dependent var 0.446429 Adjusted R-squared 0.111820 S.D. dependent var 0.501621 S.E. of regression 0.472744 Akaike info criterion 1.374535 Sum squared resid 12.06828 Schwarz criterion 1.446869 Log likelihood -36.48697 F-statistic 7.924418 Durbin-Watson stat 0.626808 Prob(F-statistic) 0.006793

Linear Probability Model Analysis

• Problem:– LPM not constrained within 0<P(x)<1

• Solution:– model with Probit!

Model with Probit

Probability of Democrat President Given Unemployment Rate

0

0.2

0.4

0.6

0.8

1

1.2

0 2 4 6 8 10 12

Unemployment Rate (%)

Pro

ba

bili

ty P

res

ide

nt

is D

em

oc

rat

Data Points

Logit Model

Probit Regression Results

Dependent Variable: DEMOCRAT Method: ML - Binary Probit (Quadratic hill climbing) Date: 11/20/03 Time: 14:35 Sample: 1947 2002 Included observations: 56 Convergence achieved after 4 iterations Covariance matrix computed using second derivatives

Variable Coefficient Std. Error z-Statistic Prob.

UNEMPLOYMENT -0.348600 0.132693 -2.627109 0.0086 C 1.783351 0.741412 2.405344 0.0162

Mean dependent var 0.446429 S.D. dependent var 0.501621 S.E. of regression 0.473574 Akaike info criterion 1.304778 Sum squared resid 12.11073 Schwarz criterion 1.377112 Log likelihood -34.53379 Hannan-Quinn criter. 1.332822 Restr. log likelihood -38.49420 Avg. log likelihood -0.616675 LR statistic (1 df) 7.920804 McFadden R-squared 0.102883 Probability(LR stat) 0.004887

Obs with Dep=0 31 Total obs 56 Obs with Dep=1 25

Further Analysis

• Is there an unemployment rate overlap due to previous presidential party affiliation?

• If so, how much overlap?– 1 year– 2 years

• Will these models produce a better/worse correlation?

0

2

4

6

8

10

12

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

Year

Un

emp

loym

ent

(%)

Democrat

Republican

0

2

4

6

8

10

12

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

Year

Un

emp

loym

ent

(%)

Democrat

Republican

One Year Forward Lag

BeforeAfter

Probability of Democrat President Given Unemployment Rate (One Year Lag)

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

0 2 4 6 8 10 12

Unemployment Rate (%)

Pro

bab

ilit

y P

resi

den

t is

D

emo

crat

Data Points

Probit Model

Probit Model of One Year Lag

One Year Lag Results

Dependent Variable: LAG1 Method: ML - Binary Probit Date: 11/20/02 Time: 21:14 Sample: 1947 2002 Included observations: 56 Convergence achieved after 4 iterations Covariance matrix computed using second derivatives

Variable Coefficient Std. Error z-Statistic Prob.

UNEMPLOYMENT -0.590586 0.162483 -3.634743 0.0003 C 3.162821 0.905592 3.492545 0.0005

Mean dependent var 0.464286 S.D. dependent var 0.503236 S.E. of regression 0.430697 Akaike info criterion 1.131294 Sum squared resid 10.01698 Schwarz criterion 1.203628 Log likelihood -29.67623 Hannan-Quinn criter. 1.159338 Restr. log likelihood -38.67326 Avg. log likelihood -0.529933 LR statistic (1 df) 17.99407 McFadden R-squared 0.232642 Probability(LR stat) 2.22E-05

Obs with Dep=0 30 Total obs 56 Obs with Dep=1 26

0

2

4

6

8

10

12

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

Year

Un

emp

loym

ent

(%)

Democrat

Republican

Two Year Forward Lag

BeforeAfter

0

2

4

6

8

10

12

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

Year

Une

mpl

oym

ent (

%)

Democrat

Republican

Probability of Democrat President Given Unemployment Rate (Two Year Lag)

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

0 2 4 6 8 10 12

Unemployment Rate (%)

Pro

bab

ilit

y P

resi

den

t is

D

emo

crat

Data Points

Probit Model

Probit Model of Two Year Lag

Two Year Lag ResultsDependent Variable: LAG2 Method: ML - Binary Probit Date: 11/20/02 Time: 21:16 Sample: 1947 2002 Included observations: 56 Convergence achieved after 3 iterations Covariance matrix computed using second derivatives

Variable Coefficient Std. Error z-Statistic Prob.

UNEMPLOYMENT -0.411472 0.126972 -3.240644 0.0012 C 2.257277 0.733633 3.076846 0.0021

Mean dependent var 0.482143 S.D. dependent var 0.504203 S.E. of regression 0.448275 Akaike info criterion 1.246607 Sum squared resid 10.85131 Schwarz criterion 1.318941 Log likelihood -32.90499 Hannan-Quinn criter. 1.274650 Restr. log likelihood -38.78052 Avg. log likelihood -0.587589 LR statistic (1 df) 11.75107 McFadden R-squared 0.151507 Probability(LR stat) 0.000608

Obs with Dep=0 29 Total obs 56 Obs with Dep=1 27

Conclusions

• A significant correlation between unemployment rate and political party affiliation was discovered

• A stronger correlation was found when applying a one year lag, and to a lesser degree, a two year lag, on this relationship

• Overall, we conclude from our data that unemployment is significantly greater when a Republican president is in office when compared to a Democrat