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Unemployment and Elections

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In my last post I focused on how ill-advised it is to make any predictions for 2012 based on unemployment rates in the summer of 2011.  As it turns out, even when measured closer in time to the election, the unemployment rate still is not a good predictor of election outcomes.  As the figure below shows, there is no relationship between the unemployment rate in July* of election years and the performance of the president's party in the November election.  It is just not a good predictor.

The problem with the unemployment rate is that it doesn't tell us much about the direction of the economy, and this is what seems to matter most in forecasting models.   One need look no farther then the 1984 election for an illustration of this point.  The unemployment rate in July of 1984 (7.5%) was very high  compared to other election years, but it was down significantly from 9.4% just twelve months earlier in July 1983.  This change in the unemployment rate signified a rapidly improving economy, which aided the Reagan landslide victory over Mondale.  But the 7.5% unemployment rate did not really speak to the changing economy, at least not on its own.
As it turns out, while the level of unemployment is not particularly relevant to election outcomes, the change in unemployment during the election year or so preceding the election is much more relevant.
The figure above shows this relationship for presidential elections from 1948 to 2008.  The correlation (-.61) is fairly strong, though there is clearly still a good deal of error in the prediction.  Still, this provides some illustration of how we might best think about the role of unemployment in the 2012 election.  Suppose the unemployment rate drops to  8.1% by next summer.  By historical standards this would be a very high unemployment rate in an election year, which might lead one to expect bad things for the Obama campaign (that is if you didn't know that the unemployment rate is unrelated to election outcomes).  But it would also mean that the unemployment rate had fallen by a full point, which would represent one of the largest election year drops in unemployment in modern times (only to be out-done by 1984).  Viewed from the perspective of change, and with the information presented above, an 8.1% unemployment rate next summer would be really good news for the Obama campaign.
Of course, there is no reason to expect a drop in unemployment of that magnitude. In fact, unemployment could even increase in the next year.  If that happens, then the task before the Obama campaign becomes very imposing. 
The take away point is that if you really want to focus on unemployment as a predictor, what's really important for the 2012 election is the direction of the economy, which is better reflected in the change in unemployment than in the unemployment rate.  At the same time, there are better measures of the direction of the economy, such as change in GDP or change in per capita income, both of which have a longer and stronger track record in forecasting models.  But, since unemployment is getting a lot of attention these days, it is best to know how it is likely to relevant to the 2012 election.
*I use July as the reference point because it is the month for which we have the most recent data, and also because I tend to favor using summer conditions to provide a little lead time in predictions.  For what it's worth, the relationship is no stronger if the September unemployment rate is used.