Commodity Prices as an Indicator of Unemployment Matthew Tizik | Department of Economics | School of Business Introduction Literature Review Research Question Variables The Federal Reserve has three goals in Although there is a broad scope of studies To what effect do commodities have on Variable Definition mind when implementing its Monetary pertaining to commodity prices, the the unemployment rate and can Source Unemployment (U) % of people who are not currently Policy: maximum sustainable current literature focuses mostly on the commodities be used to predict the Bureau of Labor working, have actively looked for employment, stable prices, moderate relation to inflation. Implementing the future unemployment rate? Statistics a job and are available for work Phillip’s Curve, we can connect Global Price Index of all Commodity price Index made up long-term interest rates. These three Hypothesis 1: If Commodity prices Commodities (GPIC) of 59.1% non-fuel commodities goals are broken down into the unemployment to inflation and note that (measured through the global price International Monetary and 40.9% energy. inflation has a nonlinear inverse relation Fund (+) respective statistics: unemployment index of all commodities) increase, then to unemployment. Federal Funds rate (FF) Interest rate at which depository rate, consumer price index, LIBOR. Of the government should implement an Federal Reserve Bank of institutions exchange money at. these three, only LIBOR is adjusted St. Louis (-) expansionary monetary policy, because Consumer Price Index Measure of the average monthly daily, while the other two are known as Cody and Mills 1991: States the use of commodity prices as a measure of unemployment will rise within the next (CPI) change in the prices of goods and lagging statistics. The focus of this Federal Reserve Bank of services that are commonly inflation is based within Keynesian month. St. Louis (-) purchased by urban consumers. paper is to better understand the economics. Furthermore, they found that unemployment statistic. Money Supply (M2) The total physical currency, if the Fed gives some weight to stabilizing Federal Reserve Bank of checkable deposits, negotiable inflation, then the optimal response St. Louis (-) order of withdrawals, savings Due to the United States’ dependency deposits, small denomination requires tighter policy when commodity time deposits, and balances in on certain products such as oil, wheat, price inflation increases. money market mutual funds. and meat, these commodities can be US Imports (I) Monthly, seasonally adjusted, and US Census (-) on a balance of payments basis of used to track the health of the United Hooker 1999: total imports of the USA States’ economy. Thus, I present the Found that oil prices made a substantial US Exports (E) Monthly, seasonally adjusted, and idea of using commodity prices as a way direct contribution to core inflation before US Census (+) on a balance of payments basis of of predicting future unemployment 1980 but little to no pass-through since total exports of the USA rates. that time. Empirical Framework Regression Results Conclusions & Further Research N = 324 The data is taken as a monthly average. The Conclusion: Dependent variable: ln(U) regression is a time series forecasting analysis that is • Overall, we find that the Global Price Index of all implemented in order to predict the unemployment Commodities is a significant variable with respect to rate of the subsequent month. All variables are taken predicting the subsequent unemployment rate. in logarithmic form, except the Federal Funds rate, in Thus, the Federal Reserve, National government, order to scale and standardize the data. and State governments should base Monetary and OLS Equation: Fiscal Policy, respectively, on the volatility of Commodities. ln($%&'()*+'&%,) = . Further Research: • Breakdown the commodities into each individual 01+ 03 ln 4)*56) 789:& ;%<&= *> 6)) ?*''*<9,9&@.A3 + 0B C&<&86) CD%<@ E6,&.A3 commodity, in order to understand which + 0F ln ?*%@D'&8 789:& ;%<&=.A3 commodities affect the unemployment rate more. + 0G ln H*%&+ ID(()+.A3 + 0J ln ;'(*8,@.A3 + 0K ln L=(*8,@.A3 + M1 • One should consider using panel data and implementing state fixed effects in order to limit omitted variable bias and to see how commodity prices affect one state as opposed to another state. .