Revisiting Okun's law in South Korea: Asymmetries, crises, and structural changes

Abstract

How well does Okun's law fit the data for Korea? This is not only a significant question but also has attracted interest lately, as economists have debated whether the Bank of Korea's policy goals should include an employment objective as in the case of the US Fed's dual mandate. Unlike major industrial countries for which Okun's law has been mostly studied, there are few (if any) recent studies on this subject for Korea. This paper attempts to fill this gap in the literature by providing a careful empirical evaluation of Okun's law for Korea in the period of 1980–2021. We go beyond the basic question about the short-term relationship between unemployment and output and investigate other related issues, such as impact of financial crises on Okun's law, structural change(s), asymmetry across business cycles, and the underlying employment-output and unemployment-employment relations, from which we derive rich and interesting results. Simultaneously, this paper also contributes to the burgeoning literature on asymmetries by carefully examining how key macroeconomic relations can change in a fundamental way after a financial crisis, that is, asymmetry before and after a crisis as well as asymmetry between expansions and recessions.