Abstract
The Great Recession of the late 2000s has brought to the fore, once again, the relevance of the relationship between output performance and labour market developments all over the world. This paper analyses the validity of Okun?s law in Spain by using regional data from 2000 to 2014, which roughly encompasses a complete business cycle. By estimating a Spatial Panel Durbin Model, the results not only show that a robust, inverse relationship between unemployment and output holds for Spain but also the existence of regional spillovers (indirect effects). In addition, they reveal that there are no time asymmetries between the expansion and recession phases of the business cycle and that human capital, the share of the construction sector, and the share of temporary workers are key factors in explaining unemployment changes. From a policy perspective, our findings support the idea of implementing region-specific policies, since indirect effects are less relevant than direct ones. In any case, national policies would also be effective. These policies, whatever their scope, should be mainly supply-side oriented in expansions (largely labour market policies) and demand-side focused in contractions.
Highlights
Given the aim of this paper, we examine the response of the unemployment rate to output performance
Notes: ** means significance at 5% level; LLC refers to the bias-adjusted t statistic for Levin-Lin-Chu unit root test; HT refers to the rho statistic for the Harris-Tzavalis test; B refers to lambda statistic for Breitung unit root test; IPS refers to the W-t-bar statistic for Im-Pesaran-Shin unit root test
Regarding the inclusion of spatial effects, we find that the coefficient of the spatially lagged unemployment rate changes is positive (0.756) and statistically significant, proving the existence of strong interregional labour market linkages
Summary
Okun’s law refers to the existence of an inverse relationship between output fluctuations and unemployment rate changes In spite of the methodological advances previously mentioned, there is a point in the analysis of Okun’s law at regional level that has been fully neglected: none of the contributions already mentioned pays much attention to the importance of regional interactions and spillovers To put it differently, none of these studies seems to be concerned about the fact that what happens in one region can significantly affect other regions and vice versa. Pereira 2014; Arabinda Basistha and Montero Kuscevic 2017; Palombi, Perman, and Tavéra 2017) have explicitly analysed Okun’s law by using spatial panel data models, and none of them studied the Spanish case Anyway, as all these papers reveal the importance of spatial spillovers, here we apply this approach to the Spanish case and try to enrich it.
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