Abstract
The impact of economic fluctuations on the total unemployment rate is widely studied, however, with respect to age- and gender-specific unemployment, this relationship is not so well examined. We apply the gap version of Okun’s law, aiming to estimate youth unemployment rate sensitivity to output deviations from its potential level. Additionally, we aim to compare whether men or women have a higher equilibrium unemployment rate when output is at the potential level. Contrary to most studies on age- and gender-specific Okun’s coefficients, which assume that the effect of output on unemployment is homogenous, we allow a different effect to occur, depending on the output gap’s sign (positive/negative). The focus of the analysis is on 28 EU countries over the period of 2000–2018. The model is estimated by least squares dummy variable estimator (LSDV), using Prais–Winsten standard errors. We did not find evidence that higher equilibrium unemployment rates are more typical for men or for women. The estimates clearly show the equilibrium level of youth unemployment to be well above that of total unemployment, and this conclusion holds for both genders. We assess greater youth unemployment sensitivity to negative output shock, rather than to positive output shock, but when we take confidence intervals into consideration, this conclusion becomes less obvious.
Highlights
Since Okun (1962) confirmed the inverse relationship between the unemployment rate and economic growth, much research has been conducted in various countries and regions
We extend our baseline Equation (9), assuming that: (i) the responsiveness of the unemployment rate to output fluctuations, i.e., Okun’s coefficient, is not the same over the periods of positive and negative output gaps, and (ii) not just equilibrium unemployment rate is country-specific, but coefficient β could depend on country-specific factors, such as labour market regulation, economic structure, etc., we allow in our model β to vary across countries
With respect to conclusions related to gender-specific youth unemployment reaction to output movements, the same holds for models with total unemployment data
Summary
Since Okun (1962) confirmed the inverse relationship between the unemployment rate and economic growth, much research has been conducted in various countries and regions. The estimations of age-specific Okun’s coefficients indicate that the youth unemployment rate is much more sensitive to economic growth compared to elderly cohorts or total unemployment (Ahn et al 2019; Dixon et al 2017; Dunsch 2017; Dietrich and Möller 2016; Banerji et al 2014, 2015; Hutengs and Stadtmann 2013, 2014a, 2014b; Zanin 2014; European Commission 2013). While the majority of studies on the age-dependent Okun’s coefficient investigate how changes in youth unemployment respond to economic growth, we estimate the so-called gap version of Okun’s law. This version allows to estimate unemployment sensitivity to output deviations from its potential level.
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