Introduction
        Seldom has economic forecasting been so uncertain. In the wake of the September 11 attacks a number of variables remain uncertain; the most important of which are visitor arrivals. Below I use a "consensus" forecast of economic growth to forecast two important labor market variables, unemployment and inflation. With the exception of the University of Hawai'i's Economic Research Organization (UHERO) forecasts of the Hawaiian economy include a jobs forecast but not one of unemployment. The two do not always move in the same direction nor do they move in conjunction with one another. For example in the nineties employment began to recover before there was significant job growth. To a certain extent this reflects differences in the way the surveys are conducted. Surveys of jobs are of establishments that are often the last to begin to hire while the employment survey conducted by the Bureau of Labor Statistics asks individuals directly whether or not they have a job. Thus the unemployment survey is more likely to pick up job creation and destruction as it occurs. In addition unemployment is the single best indicator of the condition of the economy and one that is most closely watched. This is because it is the one national economic statistic reported on a monthly basis for Hawaii and it is reported shortly after the month in which the survey is done. By comparison we must wait six months, or longer, for reports on economic growth or inflation.
     Accurate forecasts of unemployment and inflation are useful statistics for a number of reasons. For example, in the nineties changes in the unemployment rate could be used to accurately forecast state welfare expenditures. In Hawai'i, an important component of forecasting tax revenues is the inflation rate. Similarly unions negotiating contracts likewise need some sort of accurate forecast of inflation. Beyond the usefulness of these statistics, understanding the labor market in Hawaii, and how it works provides an insight on a range of economic and social issues that range from poverty to tax burdens.

Stop Signs and Speed Bumps, the Dynamic Nature of the Hawaiian Labor Market
     Generally economies tend to fluctuate around a certain level of unemployment. This is referred to as the full employment rate or the natural rate of unemployment. At a full employment rate those who are unemployed are either not qualified for the jobs available or are merely moving between one job and another. Below this unemployment rate inflation begins to take off. The simplest way to measure the full employment rate is to find the level at which the change in the inflation rate is zero. In the chart below plotting these two variables for the years 1978-2000 in a scatter plot and fitting a line between the points indicates that the full employment rate for Hawaii is 4.2 percent.

     The natural rate of unemployment is an important indicator of how competitive an economy is and how flexible its labor market is. An economy dominated by monopolies produces fewer products at higher prices and consequently needs fewer employees. Europe, for example has a natural rate of unemployment estimated to be 10 percent. Hawai'i's natural rate of unemployment has also been lower than the Mainland's. This means that our economy can grow a lower non-inflationary unemployment rate than the mainland and indicates that our labor market is actually healthier and more flexible than the mainland's labor market.
     Related to the natural rate of unemployment is the natural growth rate of an economy. When an economy grows above this rate unemployment falls, when it grows below this rate unemployment rises. This is why slow growth, even in the absence of a recession leads to rising unemployment rates. The natural rate of growth is made up of the rate of growth of the labor force and productivity. Most estimates of the mainland economy place this growth rate at 3 percent, while the estimate for Hawai'i is 2 percent. This means that following a shock to both the Hawaiian economy and the Mainland economy as both economies grow at the same rate unemployment will begin to fall sooner in Hawaii than on the mainland.
     Finally there is the speed at which unemployment drops, or rises, once growth moves above or below the natural rate. On the mainland for every 1- percent growth above or below 3 percent the unemployment rate rises or falls by .4 percent. While in Hawaii for every 1- percent growth above or below 2 percent the rate of change in the unemployment rate is .22 percent. In other words if the Mainland unemployment rate is 6 percent and the economy grows at 4 percent on average (1 percent over 3 percent) then the unemployment rate will drop to 5.6 percent on the mainland. Hawaii's unemployment rate will drop from 6 percent to 5.56 percent when the economy grows at 4 percent. Furthermore in Hawaii we will see the unemployment rate drop sooner than the mainland because it begins to drop at a lower rate of growth. In fact this adjustment rate is almost identical to the one found in the Japanese economy.
     The difference in the rate of adjustment indicates first of all that Hawai'i firms tend to hold on to employees longer after a drop in demand and to rehire more slowly. There is ample anecdotal evidence that this occurs. Second this rate also indicates how strongly attached people are to the labor market. Slow periods of growth mean workers become discouraged in their job hunt and leave the labor market. When growth picks up they return. This seems to happen much more quickly in Hawaii than on the mainland and tends to prolong periods of high unemployment.
     To sum up Hawai'i has a low rate of natural unemployment and economic growth. It also has a low rate at which its labor market adjusts to changes in growth. This has several implications. First it means that unemployment rises more slowly during the beginning of a downturn and persists for a longer period of time after some type of shock. It tends to also mean, other things being equal, that Hawai'i will tend to have a lower unemployment rate than the mainland. In addition it tells us something about why we have such a high cost of living in Hawai'i. Between 1960 and 1995, a period of 35 years, the unemployment rate was below 4.2 percent during 17 of those years and as a result our inflation rate was higher than the mainland rate.

Forecasts
     The Table below reports the forecasts for unemployment both seasonally adjusted and not seasonally adjusted for six-month periods during 2002 and 2003. The forecasts are in bold and italicized.

             Table 1: Past Unemployment and Forecast Unemployment

Period	Unemployment Rate Not Seasonally Adjusted	Unemployment Rate Not Seasonally Adjusted
1999.1	4.6	4.1
1999.2	3.6	4.2
2000.1	4.7	4.2
2000.2*	5.5	5.7
2001.1	6.1	6.0
2002.2	5.8	6.1
2003.1	6.1	6.0
2003.2	5.6	5.9

                 *November unemployment figures

     The numbers should be read as indicating, for example, that the month of June 2002 (2002.1) or December 2002 (2002.2) will have an unemployment rate as indicated. Unemployment tends to fluctuate seasonally generally being lower in December than in June. This reflects Christmas hiring during December and students looking for work in the summer. As the graph below indicates using seasonally adjusted numbers unemployment will rise to 6.1 percent and begin to decline significantly in the second half of 2003.

     Although these are higher estimates than the UHERO forecast of 5.5 percent they are consistent with forecasts for mainland unemployment. The primary difference is methodological.
     Table 2, below contains forecasts of annual average inflation. Once again the forecast number are in bold and italicized. Note that the prediction is for very mild deflation in 2003, hence the negative number.

                       Table 2:

Inflation Forecast
Year	Inflation
1999	1.0
2000	1.7
2001	1.5
2002	0.6
2003	-0.1

     To summarize the forecast for unemployment is that it will peak in 2002 at about 6 percent then begin to decline in 2003. This assumes that Hawai'i's economy grows at a sustained annual rate of 3.5 percent beginning in the second half of 2002. The inflation rate will decline to effectively zero in 2003.

Summary
     These results indicate why the perception of Hawai'i's economy is often at odds with other economic statistics. While the statistics often indicate growth and recovery two of the most commonly watched statistics will indicate stagnation and continued recession. It should also be remembered that these statistics actually represent real people. For example the ones most at risk of losing their jobs are newly hired former welfare recipients who might not qualify for either welfare assistance or unemployment insurance. Unemployment generally leads to higher rates of poverty thus placing enormous burdens on families. This forecast also indicates that the state budget will be squeezed from two directions, rising welfare assistance will lead to increased spending while declining price levels and incomes will lead to decreased revenues. These place large burdens on the state budget and have led in the past to cuts in education thereby jeopardizing future long-term growth prospects. The Hawaiian economy, suffering from a mild, and possibly short recession, will as a result enter a sustained period of high unemployment and low inflation.