Switching and asymmetric behaviour of the Okun coefficient in the US: Evidence for the 1948–2015 period

Abstract

This paper examines whether the relationship between unemployment and output, known as Okun's law, has been stable in the United States (US) in the period since World War II. A feature of our modelling approach is that we employ a Markov switching model in which we allow for both the presence of possible asymmetries within, and across, regimes and for the variance in the error term to switch over time. The extent of within-regime asymmetry is found to be much stronger than across-regime asymmetry. We provide evidence of a weakening of Okun's law since the 1981–1982 recession. We also show that jobless recovery, as witnessed most recently in the aftermath of the global financial crisis (GFC), is not a new phenomenon in the US, but also dates back to the early 1980s recession. We conclude through providing insights into the US jobless recovery and offering suggestions, based on our findings, for reducing the adverse effect of recessions in the future.