An empirical estimation of the relationship between Edmund Phelps ’ “ investment driving forces ” and the unemployment rate

On his invited lecture at Beijing University, China, December 2004, Edmund S. Phelps, the winner of the 2006 Nobel Prize in Economics, proposed four indicators of “investment driving forces”, which could be used in measuring the economic growth of a country’s performance, and which might in turn also be eventually reflected in the country’s employment situation. In addition to Edmund Phelps’ four indicators, such as (1) the rate of changes of investment, (2) the rate of changes of foreign exchange (that is, forex) rate, (3) the rate of changes of employees’ wage incomes as a proportion of GDP, and (4) the rate of changes of the market values of listed stocks as a proportion of GDP, authors suggested two more indicators (5) the severity of market values of fraud companies, and (6) the overdue rate of overall financial institutions. Through the application of regression analysis methodology, this paper will make an empirical estimation, based on Taiwanese historical investment data, on the relationship among “investment driving forces” and country’s economic performance in terms of unemployment rate.


INTRODUCTION
Edmund S. Phelps, the Nobel Prize Laureate of Economics in 2006, argued in his works, "Structural slumps: The modern equilibrium theory of unemployment, interest, and assets" (1994), that unemployment rate is not only affected by the insufficient overall effective demand proposed by the Keynesian theory, but is also subject to the impact of structural factors such as pay incentives, restrictions of working conditions, tax rate, regulatory restrictions, and changes in technological advances.
The treatise advocates that the rate of changes of investments is determined by real interest rate, the expected technological progress, productivity growth, eligibility rights, patents, stock of corporate assets, labor wealth, tax rate, political atmosphere, investor integrity, social order, etc.These non-monetary factors will determine the value of business investment assets and *Corresponding author.E-mail: uftina@gmail.com.investment cost, and furthermore will determine the rate of changes of investment and the unemployment rate.Ten years after the publication of the treatise, Edmund S. Phelps, Hian Tieck Hoon and Gylfi Zoega (2004) proposed the following ideas in addition to reiterate the 1994 viewpoints previously described: (1) The rise of stock index as a proportion of enterprise investment cost, or the market value of stocks as a proportion of gross domestic product (GDP) will increase the value of corporate assets, which will in turn lead to the expansion of business investment environment, the creation of job opportunities and the reduction of the unemployment rate.
(2) The higher degree appreciation (or depreciation) of country's currency will cause the decreasing (or increasing) of the domestic prices of the imports from abroad, and will make the increasing (or decreasing) of the foreign prices of the exporting products and services.The concerns of the risk of losing (or gaining) customers in the foreign markets, gradually slowing down (or rising up sharply) the markup prices of business operations, increasing (or decreasing) the volumes of industry productions and the amounts of investments on enterprises and eventually causing the falling (or rising) of the unemployment rates.The logic of this reasoning is contrary to the arguments of the Keynesian theory that the currency appreciation (or depreciation), will reduce (increase) overall effective demands and increase (or decrease) unemployment rate.The arguments and observations of Phelps et al. (2004) that currency depreciation (or appreciation) will lead to economic contraction (or expansion) and increase (or decrease) unemployment rate were first pointed out in 20 to 30 years ago, by several economists including the lecturing professor at Princeton University, Richard N. Cooper (1971), Taiwanese economists Chau-Nan Chen (1973) and Ching-Chong Lai (1982).However, Wang and Wang (1985) made a systematic exposition in writing, including a methodical discussion of facts and the principles involved.Chun-Yuan Wang published his arguments on international social sciences citation index (SSCI) journals by using the tight money effect and the spillover effect theories respectively, almost 20 years earlier than Edmund S. Phelps' lecture at Beijing University.This type of repetitious is unknown to Edmund S. Phelps as he did not read the previously mentioned four papers.
On December 2004, Edmund S. Phelps proposed four indicators of "investment driving forces", (1) the rate of changes of investment, (2) the rate of changes of forex rate, (3) the rate of changes of employee's wage incomes as a proportion of GDP, and (4) The rate of changes of the market values of listed stocks as a proportion of GDP, for diagnosing a country's economic performance in terms of unemployment rates.
Authors believed that two more indicators should be included, such as (5) the severity of market values of delisted companies (that is, due to closing down for poor management or for false accounting practices, deceitful business or for serious offense and violation of regulations) and ( 6) the overdue ratio of overall financial institutions.In fact, the economic performances has been significantly harmed deeply and also reflected on the rising scale of the unemployment rates in Taiwan.This paper will make an empirical estimation of the impact of the previously mentioned 6 indicators on the Taiwan's unemployment rate.(1936) argued: appropriate currency depreciation or undervalued currency helps lower exporting prices, enhance export competitiveness or increase the exporting profits of business firms and reduce imports.This will help maintain the original investment and increase a country's newly increased investments, and thus can effectively lower the overall unemployment rate.Conversely, appropriate currency appreciation or currency overvaluation may increase overall unemployment rate.However, Phelps (2004) argued that, currency depreciation leads to rising domestic prices and falling foreign prices.The business greed will lead to over mark-up pricing, coupled with outflow of capital; it will be unfavorable to production and investment, leading to the rise of overall unemployment rate.On the contrary, currency appreciation leads to falling domestic prices and rising foreign prices.Fearing losing market and customers, the business will inhibit mark-up pricing.Coupled with inflow of capital, this will be beneficial to production and investment to lower the overall unemployment rate.

THEORIES
(3) The rate of changes of employee's wage income as a proportion of GDP ) ( • t W : it continuously and positively grows; it indicates the continuous growth of margin production of the employees.In addition to keep the original working opportunities, it can create new employment opportunities.As the enterprises continue to expand production, it corresponds to lower overall unemployment rate.Conversely, if • t W has negative growth, it will lead to relatively higher overall unemployment rate.(4) The rate of changes of the market value of listed stocks as a proportion of GDP ) ( • t MVD : the continuous positive growth of it indicates that the value of business investment assets and the investment income and wealth of the general public are growing.As it can help enhance the new investment and consumption of a country, it can effectively lower the overall unemployment rate.Conversely, if • t MVD negatively grows, it will lead to relatively higher overall unemployment rate.
We propose the fifth indicator to explain the unemployment rate, namely, "severity of market value of delisted company due to close down from poor management or for false accounting fraud or for serious offense and violation of regulations value is, the bigger bankruptcy of the company is.It will directly increase the overall unemployment rate and will indirectly affect economic expansion.In addition, the bigger t F value also indicates the business investment asset value and the capital loss and the wealth of the general public decrease dramatically.In this case, the political, social and economic environment will be diffused with uncertainty and distrust.As is shown thus, we integrate the four indicators of the "investment driving forces" proposed by Phelps (2004) with the indicators proposed in this article the value of F or the FD value to explain the unemployment rate ) (UR by using the following function: The regression estimation of unemployment rate function of Equation 1 can be represented as:        (%) UR τ Equations 10 correlation coefficients imply the following: (1) The increase or decrease of investment increase rate • t I and • −1 t I of the current year and the preceding year is in a negative relationship with the current year's unemployment rate t UR .In the 99% probability distribution, it is double-tail significant, which is in line with the theoretical propositions of John Maynard Keynes (1936) and Phelps (1994Phelps ( , 2004)).The preceding year investment increase rate • t W is in a negative relationship with t UR .In the 95% distribution probability, it is double-tail significant, which is in line with the theoretical propositions of Phelps (1994Phelps ( , 2004)).
(3) The rate of changes However, this complies with the propositions and findings of Phelps (1994Phelps ( , 2004)).
(4) The market value of listed stock as a proportion of GDP of the current year and the preceding year UR .In the 95% probability distribution, it is double-tail significant, which is not in line with the proposition of Phelps (1994Phelps ( , 2004)).However, the rate of change  Phelps (1994Phelps ( , 2004)).Taiwan's unemployment rate tends to grow in the long run.The long term growth of the market value of listed stock as a proportion of GDP does not help to lower long term unemployment rate.Namely, the rise of financial market value cannot help the structural employment opportunities in the real economic aspect in the long run.However, the rising rate of change at each short period will slightly help lower the unemployment rate of the period.
(5) The Taiwan stock index st P and 1 − st P of the current year and the preceding year are positively related to the current year unemployment rate t UR .Being similar to MVD , it is not in line with the proposition of Phelps   (1994, 2004).The rate of change  Phelps (1994Phelps ( , 2004)).( 6) According to equations ( 3 A u are below 0.5 as not significant.There is no high homology in between the indicators, and thus they can be listed as explanatory variables.The matrix of correlation coefficients is as shown in Table 1.

THE REGRESSION ANALYSIS OF IMPACT OF MAJOR INDICATORS OF "INVESTMENT FORCES" AND ITS ADDITION ON TAIWAN'S UNEMPLOYMENT RATE UR t
Regarding the 29 years in the period of 1978 to 2006, we Chiao and Wang 8285 used the four indicators of the "investment driving forces" as proposed by Phelps (2004) (3) 1988 to 2006 Period              According to the estimation results of the aforementioned 11 regression equations, the analysis of the regression relationships between the major indicators of "investment driving forces" proposed by Phelps et al. (1994Phelps et al. ( , 2004) ) coupled with the delisting market value of delisted companies t F and its accumulated value ∑ t F as well as the indicator of economic harm severity And both of them are double-tail significant in case of about 95 to 99% probability distribution, which is in line with the theoretical propositions of Phelps (1994Phelps ( , 2004)).
(2) The current stage NTD/USD currency depreciation rate of change • t e will lower Taiwan's unemployment rate t UR .This regression coefficient is not double-tail significant above 90%, rather it is a consistent negative value, complying with the theoretical propositions of John Maynard Keynes (1936) but differing from the arguments and empirical findings of Phelps (1994Phelps ( , 2004)).However, the impact of the previous stage currency depreciation rate of change 1 − • t e on UR t may be positive or negative at an insignificant level.
(3) In the regression equations ( 18) and (19) of higher explanatory capability, the impact of the current period market value of listed stocks as a proportion of GDP t MVD and its rate of change • t MVD on Taiwan unemployment rate t UR is negative, indicting it helps reduce unemployment rate.This is in line with the theoretical arguments and empirical findings of Edmund S. Phelps (1994Phelps ( , 2004)), although at an insignificant level.

Figure 1 .
Figure 1.The relationship between Taiwan's unemployment rate UR and t W •

Figure 2 .Figure 3 .
Figure 2. The relationships between Taiwan's unemployment rate UR and t W ,

Figure 4 .Figure 5 .
Figure 4.The relationship between Taiwan's unemployment rate UR and investment growth rate

Figure 9 .
Figure 9.The relationships between Taiwan's unemployment rate UR and the delisting market value of delisted companies F and its accumulated market value F ∑ .

Figure 10 .
Figure 10.2001 to 2006 period, the relationships between Taiwan's unemployment rate UR and F , F ∑ .

Figure 11 .
Figure11.Taiwan unemployment rate UR and average financial institution's overall overdue ratio A u , relatively high value of financial institution's overall overdue ratio m u , deposit and loan interest rates d i and i as well as the effective tax rateτ .

Figure 12 .
Figure 12. 1995 to 2006 period, Taiwan's unemployment rate UR and average financial institution's overall overdue ratio A U and relatively high financial institution's overall overdue ratio m U .
is in line with the propositions of ) to (10) that, correlation coefficients in between t I

tFD
on Taiwan's unemployment rate in the period of 1978-2006 or the period of 1988-2006 can get the following results: (1) The rise of the current and previous stage the change in Taiwan's unemployment rate t UR .
As the original investment and consumption cannot be kept, regardless of new investment and consumption, it will lower the employment opportunities and the level of effective demands and enhance overall unemployment rate.Conversely, if the t F value is smaller or even the t F value is 0, it will not reduce the business investment asset value, employment opportunities and the level of effective demands and increase the overall unemployment rate.Considering that the delisting of listed companies were few in Taiwan before 1995, we assume the alternative virtual variable t FD of F value of this period as 0. During the period from 1996 to 2000, Taiwan was in the cross-strait crisis and the Asian financial crisis and many companies went bankrupt with increasing number of delisted fraud companies.Thus, we assume the period t FD value as 1.From 2001 to 2002, the market value of delisted companies increased abruptly from 971.11million to 240.03 million NTD.As a result, we assume the t FD value as 2. Since 2003, the delisting market value of the fraud companies has become a high-level economic burden and has been accumulating up to 3429.55 million NTD in 2006, harming the economy seriously.It is continuing to deteriorate and thus we assume the value of FD since 2003 as 3 to indicate the severity.

Table 1 .
Pearson correlation coefficients of various explanatory variables of this article indicate that they are not collinear.