The Research On Natural Rate Of Unemployment Of China

In accordance with “the national economic and social development guidelines inthe12th5-year planning of the People Republic of China”, our government will takethe promotion of employment into its first account, say the priority of employmentpolicy, to reach the target of full employment. Anyway, our country is in a graveemployment situation, and there exists serious structural unemployment and frictionalunemployment, which leads to the fact that the unemployment rate and naturalunemployment rate are both in a high level. In the mean time, the rate of inflation inChina is also high. So the government has to figure out a method to balance thecomplex relationship of the inflation rate and unemployment rate. The Phillips Curveis the formula that can bridge the inflation rate and the unemployment rate, and thisformula defines the concept of natural unemployment rate, which is the key to theresearch of internal efficiency in an economic system and also the main factor tobalance the inflation and unemployment. All in all, the study on the Phillips Curveand unemployment is meaningful in both the theoretic and practical filed.The purpose of this paper is to calculate the Phillips Curve and estimate thenumber of natural unemployment rate of China by the means of empirical research,and find out the main factors which determines the natural unemployment rate.Finally, based on the results to the Phillips Curve, natural unemployment rate andmain factors, we try to find out the policies that fit China best and balance theinflation and unemployment perfectly.Specifically, to build the mathematical model of state space, we chose thePhillips Curve with expectations as our information equation, and we assume thenatural unemployment rate is a random walk itself which forms the acquired stateequation of the model. Next we collected all the data from the Chinesemacroeconomic yearbook between1978and2009. Then we can solve the model andcompute the accurate number of the natural unemployment and the Phillips Curve.Finally, we take advantage of the principal component analysis method from themultivariate statistical analysis to figure out the main factors that influence the naturalunemployment rate.The main results of this paper are as follows. Firstly, Chinese macroeconomic has its own Phillips Curve with expectation, which is a curve that leads to the topright in the coordinate system. Secondly, the supply shock is a main influence of therate of inflation. Thirdly, the expectation of the inflation rate in China shows thefeatures of rational expectations. Fourthly, the variation trend of the naturalunemployment rate in China shows the figure of U, in concrete, it goes down in thefirst and heads up then in the period of1978-1989,1990-2004and2004-2009, and thefeatures are different in each of the three periods. Fifthly, according to the results ofthe principal component analysis, we finds out the main factor and the relationshipbetween the factors and the natural unemployment rate, and the main negative factorsare the percentage of the primary industry and percentage of rural population. Finally,the acceleration of urbanization and upgrading of an industrial structure are the maintwo factors are the main two reasons to explain the increasing of the naturalunemployment rate of China in the recent decade. The abundant labor force from therural area will directly cause the structural unemployment and frictionalunemployment in the urban area.As for the innovation points of this paper, you can see that we use the statisticaldata between1978and2009to finish the estimation of the Phillips Curve and thenatural unemployment rate. Furthermore, we calculate the specific form of thePhillips curve which heads up to the top right which can explain the macroeconomicsituation of China: high increase, high inflation and low employment. Thirdly, basedon the calculated Phillips curve, we can reach the conclusion that the supply shock isthe main influence to the inflation and can decide mechanism of the expectation ofinflation. Finally, with the help of the principal component analysis methods, wechose9components and find out the urbanization ant the adjustment of the industrialstructure can be the explanation to the fact that the increasing high unemployment ofChina during the last10years.However, there are some shortages appearing in this paper. Firstly and commonly,the data collected might be insufficient and inaccurate. On the other hand, in theprincipal component analysis, the components we chosen might not be enoughcomparing to the complex real economic and the principal component analysis cannot give the quantitative results of how the each factor influences the naturalunemployment rate. Last but not least, with the limitation of time and article length,we can’t penetrate deeply in to the theory of the Phillips Curve and the natural unemployment rate, and we should have investigated and surveyed more thoroughlyabout the real Chinese macroeconomic, which can directly lead to the inaccuracy inthe policy proposals.