ACADEMIA DE STUDII ECONOMICE

FACULTATEA RELAII ECONOMICE INTERNAIONALE

Assignment 1
Average Net Wage , IPC, Industry Productivity, Unemployment Rate
Caraman Oana, Toma Adela, Ungureanu Olivia 12/2/2010

Bucharest

1. We selected 4 economic variables: the average net wage (RON), the CPI (% - previous month=100), the industry productivity (%- 2005=100) and the unemployment rate(%) and we analyzed the monthly data for Jan 2005-Dec 2007, meaning 36 observations. The source of the data is www.insse.ro . To compute the mean, standard deviation, skewness and kurtosis for each of the 4 variables we used the function in Excel from Data->Data Analysis ->Descriptive Statistics. Average Net Wage (RON) 880.9166667 Mean Standard Error 24.28610469 841.5 Median 1040 Mode 145.7166281 Standard Deviation 21233.33571 Sample Variance -0.290152277 Kurtosis 0.658191878 Skewness 592 Range 674 Minimum 1266 Maximum 31713 Sum 36 Count 49.30341336 Confidence Level(95.0%) Coefficient of 16.54% variation CPI (%) (previous month=100) 100.5433333 0.070287392 100.51 100.6 0.421724351 0.177851429 0.52151138 0.787470776 1.87 99.93 101.8 3619.56 36 0.142690991 0.42% Industry productivity (%) (2005=100) 114.4361111 2.551346214 113.35 107.7 15.30807728 234.3372302 -0.721354455 0.32991401 57.2 89 146.2 4119.7 36 5.179508144 13.38% Unemployment Rate (%) 5.191666667 0.129061017 5.25 5.6 0.7743661 0.599642857 -0.975503288 -0.399129852 2.6 3.8 6.4 186.9 36 0.262007792 14.92%

Average Net Wage: We can observe that between the actual values of the average net wage and the estimated or forecasted ones there is a mean difference of 145.71 RON. In terms of coefficient of variation, it is smaller than 35% which means that the variation is not very large, the average is significant and data series is homogenous. As per the histogram, the intervals 674-773 and 773-871 RON contain 21 observations out of a total of 36 observations, thus the value of the average net wage during 2005-2007 was mostly between 674 - 871 RON. We can also observe the tail on the right side is longer than the left side and the bulk of the values lies to the left of the mean, this being consistent with the 2

positive skew recorded for the average net wage, of 0.658191878. Regarding the kurtosis, the negative value of -0.290152277 indicates a wider peak around the mean (that is, a higher probability than a normally distributed variable of values near the mean) and thinner tails (if viewed as the height of the probability densitythat is, a lower probability than a normally distributed variable of extreme values).

Average Net WageHistogram

12 10 Frequency 8 6 4 2 0 674 773 871 970 1,069 Intervals 1,167 1,266 More

Consumer Price Index:

The mean difference between the actual values of the CPI and the forecasted ones is 0.42 %. It can be observed that the standard deviation is not as high in comparison with the average, which indicates that the data series are spread out over a medium range of values. In terms of coefficient of variation, it is smaller than 35% which means that the variation is not very large, the average is significant and data series is homogenous. We can observe in the histogram that the CPI values during 2005-2007 were mostly between 99.93-100.24 %, with 11 observations included in this interval out of a total of 36. We can also observe the tail on the right side is longer than the left side and the bulk of the values lies to the left of the mean, this being consistent with the positive skew recorded for the average net wage, of 0.787470776. This is a distribution with a positive excess kurtosis 0.52151138, meaning

that it has a more acute peakaround the mean (that is, a lower probability than a normally distributed variable of values near the mean) and fatter tails (that is, a higher probability than a normally distributed variable ofextreme values).

CPI Histogram
12 10 Frequency 8 6 4 2 0 99.93 100.24 100.55 100.87 101.18 101.49 101.80 More Intervals

Industry Productivity We can observe that between the actual values of the average net wage and the estimated or forecasted ones there is a mean difference of 15.3 % . It can be observed that the standard deviation is not as high in comparison with the average, which indicates that the data series are spread out over a medium range of values. In terms of coefficient of variation, it is smaller than 35% which means that the variation is not very large, the average is significant and data series is homogenous. The histogram shows no obvious concentration of the values in a determined interval. The values are almost evenly spread between 98.53% and 127.13%. The positive skew 0.32991401 is represented in the histogram by the fact that the tail on the right side is longer than the left side and the bulk of the values lies to the left of the mean. Regarding the kurtosis, the negative value of -0.721354455 indicates a wider peak around the mean (that is, a higher probability than a normally distributed variable of values near the mean) and thinner tails (if viewed as the height of the probability densitythat is, a lower probability than a normally distributed variable of extreme values).

Industry productivity Histogram

10 8 Frequency 6 4 2 0 89.00 98.53 108.07 117.60 127.13 136.67 146.20 More Intervals

Unemployment Rate We can observe that between the actual values of the average net wage and the estimated or forecasted ones there is a mean difference of 0.77 % . It can be observed that the standard deviation is not as high in comparison with the average, which indicates that the data series are spread out over a medium range of values. In terms of coefficient of variation, it is smaller than 35% which means that the variation is not very large, the average is significant and data series is homogenous. As seen in the histogram, the highest number of observation, 10 out of 36, are included in the interval 5.53-5.97. However, there is no obvious concentration of the valued regarding the unemployment rate. The negative skew -0.399129852 is represented in the histogram by the fact that the tail on the left side is longer than the right side and the bulk of the values lies to the right of the mean. The histogram shows no obvious concentration of the values in a determined interval. The values are almost evenly spread between 98.53% and 127.13%. The positive skew 0.32991401 is represented in the histogram by the fact that the tail on the right side is longer than the left side and the bulk of the values lies to the left of the mean. Regarding the kurtosis, the negative value of -0.975503288 indicates a wider peak around the mean (that is, a higher probability than a normally distributed variable of values near the mean) and thinner tails (if viewed as the height of the probability densitythat is, a lower probability than a normally distributed variable of extreme values).

12 10 Frequency 8 6 4 2 0 3.80

Unemployment Rate Histogram

Frequency

4.23

4.67

5.10

5.53

5.97

6.40

More

Intervals

2. Out of the four economic variables, we selected as the dependent variables thr average net wage. We started from the hypothesis that the productivity is the most important factor in determining the wage levels, meaning when the productivity is high, the wage levels grow accordingly. Also, we chose the unemployment rate because we interpreted it as the offer available on the labour force market. More precisely, we expected that when the offer is high, the wages will be lower. We also chose the CPI as a determining factor for the average net wage due to the fact that salaries are annually indexed with the inflation ratio. We ran a series of regressions with these four variables, in combinations of two, three and four variables, in order to see how each variable and each combination influences the average net wage. For each regression, we created the ANOVA table, identified the coefficients and the residuals and obtained the regression statistics. We computed the coefficients using two methods: the regression and the solver in excel. We checked that we obtained the same values for the coefficients, no matter the method used. The only differences found when computing the coefficients using the Solver were related to the intercept. But, due to the fact the intercept has no economic meaning, we considered this difference to be irrelevant.
Wage-IPC WageIndProduc tivity WageUnempRate Wage-IPCIndProd Wage-IPCUnemRate WageIndProdUnemRate Wage-IPCIndProdUnemrate

Multiple R

0.037 0.001

0.79 0.63

0.84 0.71

0.80 0.64

0.84 0.71

0.86 0.73

0.86 0.74

R Square

We extracted for each of the regression the indicators Multiple R and R Square in order to determine the most significant combination of variables which would influence the average net wage. As seent in the table, the CPI has almost no influence over the average net wage, due to the fact that the Multiple R and the R Square are very close to zero. The most relevant regression is the one which combines the CPI, the industry productivity and the unemployment rate. Based on the table above, the Multiple R is 0.86, which indicates a very strong relation between these three variables and the average net wage. Moreover, the R Square indicates that these variations of these three variables explains the variation of the average net wage in a proportion of 74%. Thus, we can conclude that we should rely on this regression to see how the average net wage varies in time. 3. We selected two variables (the average net wage and the industry productivity) and made a forecast for the following 5 time periods, meaning Jan-May 2008. For this, we had to chose between 4 method: all-period average, 3 month Moving Average, Exponential Smoothing with alpha = 0.2 and with alpha = 0.3. For the two variables, we computed the forecasts for the entire period 2005-2007 in order to determine which method gives us the best estimate. In order to compare them, we calculated Absolute error, Relative error, Absolute values, Square of absolute error and Absolute values of relative error. We chose the method based on these precision coefficients, summarized in the table below:
AE
Average Net Wage (RON) Industry productivity (%) (2005=100) Average Net Wage (RON) Industry productivity (%) (2005=100) Average Net Wage (RON) Industry productivity (%) (2005=100) Average Net Wage (RON) Industry productivity (%) (2005=100)

MPE 11% 10%

MAD 115.83 12.51

MSE 2401.00 245.96

MAPE 12% 10%

113.03 12.30

All period average

29.59

3%

37.12

3669.04

4%

3 months Moving Average

2.33 51.84 6.11 38.35 4.21

2% 5% 5% 4% 3%

7.73 55.31 7.97 43.57 7.51

89.54 5,896.72 96.19 4296.12 81.60

6% 6% 7% 5% 6%

ES alpha=0.2

ES alpha=0.3

Analysing the precision coefficients, we can observe that the 3 months moving average is the most accurate method for the forecasting of the average net wage, both in terms of bias and 7

precision. Regarding the forecast for the industry productivity, we selected the exponential smoothing method with alpha = 0.3. Although it hasnt the best coefficients in terms of bias, the precision is more important, and these coefficients (MAD, MSE and MAPE) indicate that this is the proper method to be used in forecasting the industry productivity. The next step was to compute the seasonality indexes and the trend. First, we calculated the centered average, beginning with June 2005 and ending with June 2007 (the months for which we had one year of data surrounding them). After that, the seasonality factors for each month were computed by dividing the actual value to the centered average for that particular month. Next, we calculated the seasonality indexes to be used in the forecast by making an average of the seasonality factors for a particular month in each of the three years.
Seasonality factors 2005
Average Net Wage (RON) Industry productivit y (%) (2005=100) n/a n/a n/a n/a n/a 1.018 0.968 0.946 1.050 1.038 1.075 0.960

Seasonality factors 2006

Average Net Wage (RON) Industry productivit y (%) (2005=100) 0.904 0.931 1.044 0.934 1.031 1.045 0.982 0.927 1.036 1.063 1.051 0.899

Seasonality factors 2007

Average Net Wage (RON) Industry productivit y (%) (2005=100) 0.924 0.966 1.098 0.935 1.045 1.021 n/a n/a n/a n/a n/a n/a

Month

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

n/a n/a n/a n/a n/a 0.979 0.978 0.973 0.963 0.961 0.990 1.072

1.032 0.948 1.010 1.011 0.990 0.969 0.968 0.951 0.956 0.946 0.976 1.162

0.954 0.962 1.020 1.016 0.983 0.981 n/a n/a n/a n/a n/a n/a

We deseasonalized the prior average net wage and the industry productivity figures by dividing the actual figures by the corresponding seasonal index, in order to remove the differences attributed to seasonality. Then we generated a forecast using the exponential smoothing method with alpha = 0.3 and the de-seasonalized data. After obtaining the forecast, the data was re-seasonalized by multiplying the forecasted data with the seasonal indices. We also obtained a forecast for 5 months into the future, up to May 2008. For the trend we regressed the de-seasonalized sales on the time indices (since we have an even number of data, we chose the time indices as 35, -33, , 33, 35).

Average Net Wage:

Intercept X Variable 1 Coefficients 888.7718932 6.401954302

The x coefficient indicates that the average net wage increases by 6.401 RON per month. So, we can improve the exponential smoothing using this trend. That means the January forecast is 6.401 higher than the initial forecast of 1,120.24, the February forecast is 6.401*2 higher, and so on. Therefore, we have:
Forecast Dec 2007 Trend from regression Nr of periods out Forecast with trend Seasonality factor Re-seasonalized forecast

2008M01 2008M02 2008M03 2008M04 2008M05

1,120.24 1,120.24 1,120.24 1,120.24 1,120.24

6.401954302 6.401954302 6.401954302 6.401954302 6.401954302

1 2 3 4 5

1,126.64 1,133.05 1,139.45 1,145.85 1,152.25

0.993000694 0.954938438 1.015162414 1.013259829 0.986934242

1,118.76 1,081.99 1,156.72 1,161.04 1,137.20

Industry productivity:
Intercept X Variable 1 Coefficients 115.0622013 0.619111308

The x coefficient indicates that the industry productivity increases by 0.619 % per month. So, we can improve the exponential smoothing using this trend. That means the January forecast is 0.619 higher than the initial forecast of 137.25, the February forecast is 0.619*2 higher, and so on. Therefore, we have:
Forecast Dec 2007 Trend from regression Nr of periods out Forecast with trend Seasonality factor Reseasonalized forecast

2008M01 2008M02 2008M03 2008M04 2008M05

137.267428 137.2674282 137.2674282 137.2674282 137.2674282

0.619111308 0.619111308 0.619111308 0.619111308 0.619111308

1 2 3 4 5

137.8865395 138.5056508 139.1247621 139.7438734 140.3629847

0.913946296 0.948440176 1.070809666 0.934775904 1.038100391

126.020892 131.3643238 148.97614 130.6292056 145.7108694

For the Winter model, we had to update the estimates for the seasonality factors: For M01 2005, the Level was chosen to be equal to the average net wage for that month, while the Trend was initially set at 0. Alpha and Beta were arbitrarily chosen as equal to 0.1, while gamma was set at 0.2.

Level M02 = alpha*( Average Net Wage M02/Season M01 initial) + (1-alpha)*(Level M01+ Trend M01) Trend M02 = beta*(Level M02 Level M01) + (1-beta)*Trend M01 Season M01 = gamma*( Seasonality Average Net Wage M01initial/Level M01) + (1gamma)*(Season M01 initial) The forecast into the future was then calculated as: Forecast 2008M01 = (Level 2007M12 + 1*Trend 2007M12)* Season 2007M01 Forecast 2008 M02 = (Level 2007M12 + 2*Trend 2007M12)* Season 2007M02 Forecast 2008 M03 = (Level 2007M12 + 3*Trend 2007M12)* Season 2007M03 Forecast 2008 M04 = (Level 2007M12 + 4*Trend 2007M12)* Season 2007M04 Forecast 2008 M05 = (Level 2007M12 + 5*Trend 2007M12)* Season 2007M05 The generated results are shown above:
Seasonality: gamma M01 initial M02 initial M03 initial . . . . . . . Trend: beta 0,1 0 -0,17195 -0,40879 -0,25933 -0,15968 0,03352 0,31166 0,68524 1,05652 1,49135 0,2 0,99300 0,95494 1,01516 1,01326 0,98693 0,97604 0,97310 0,96222 0,95957 0,95356 0,98323 1,11700 1,19300 1,14183 1,21217 1,21970 1,18678 1,17595 1,17443 1,16354 1,16022 1,15437

Monthly Data 2005M01

Average Net Wage (RON) 723

Level: alpha 0,1 723 721,280466

2005M02 674 2005M03 708 2005M04 743 2005M05 720 2005M06 722 2005M07 730 2005M08 734 2005M09 736 2005M10

718,7401961 719,8259574 720,563153 722,3354759 725,1503491 729,1978243 733,5958265 739,0006925

10

742 2005M11 774 2005M12 848 2006M01 826 2006M02 767 2006M03 828 2006M04 839 2006M05 833 2006M06 835 2006M07 842 2006M08 841 2006M09 860 2006M10 866 2006M11 908 2006M12 1.099 2007M01 918 2007M02 941 2007M03 1.013 2007M04 1.027 2007M05 1.012 2007M06 1.023 2007M07 1.040 2007M08 1.030 2007M09 1.040 2007M10 1.084 2007M11 1.121 2007M12 1.266 Forecast 1233,86 1191,70 1273,32

745,1627105 748,3266851 744,6022692 738,6637851 733,7838733 729,3652655 726,3761777 724,2577645 722,8968052 722,1979511 723,4188616 725,5913839 729,0137246 737,9803729 729,9395583 726,7386283 724,2861041 722,2681772 720,9361339 720,9443299 722,1790966 723,3214992 725,1259742 730,3587171 735,5755214 739,9817256

1,95842 2,07897 1,49863 0,75492 0,19144 -0,26957 -0,54152 -0,69921 -0,76538 -0,75873 -0,56077 -0,28744 0,08354 0,97185 0,07058 -0,25657 -0,47616 -0,63034 -0,70051 -0,62964 -0,44320 -0,28464 -0,07573 0,45512 0,93129 1,27878

1,19097 1,34364 1,41486 1,34950 1,43785 1,44976 1,41614 1,40653 1,40739 1,39644 1,39798 1,39307 1,44008 1,64148 1,66639 1,60847 1,71758 1,73414 1,69688 1,69032 1,69540 1,68123 1,68483 1,68992 1,74487 1,98365

2008M1
2008M2 2008M3

1 2 3

11

2008M4 2008M5

4 5

1286,39 1259,52

The same formulas were used for Winter Industry Productivity.

Then, in order to find the exponential smoothing coefficients , we calculated the estimated value (sum of level and trend times seasonality) , residual value (difference between actual and estimated value), square of the residual value and the sum of the squares. Then we used Solver to minimize this sum, by changing the values of the coefficients and we obtained for Average Net Wage alpha= 0,268612884333555 beta= 0,39072938495035 and gamma= 0 ( no seasonality), for the second variable Industry Productivity we obtained alpha= 0,118686486340813, beta= 0,00978487140503049 and gamma= 0,138786323841516.

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