Okun's Coefficient Research Articles

Economic growth and unemployment nexus: empirical test of Okun’s law in Somalia

This paper aims to empirically examine the relationship between GDP and unemployment in Somalia from 2000 to 2021. The study also estimates Okun's coefficient. To evaluate the association between the unemployment rate and economic growth, we employ the Hodrick–Prescott (HP) filter detrending technique, the Augmented Dickey–Fuller (ADF) test, ordinary least squares (OLS), and fully modified OLS. The findings of this study demonstrate that the series is stationary at the level. However, the results confirm a statistically insignificant negative relationship between unemployment and economic growth. Consequently, our findings suggest that Okun's law does not apply in Somalia. For robustness, we employ fully modified ordinary least squares (FMOLS), canonical cointegrating regression (CCR), and dynamic ordinary least squares (DOLS). Nevertheless, the relationship between the GDP gap and unemployment is not strong enough to be considered statistically significant, and other factors may also influence unemployment. Therefore, policies aimed at reducing unemployment should take into account various factors, including education and training, labor market regulations, and social protection measures.

Empirical Evidences Regarding Okun's Law in the Central and Eastern Europe in the Post – Financial Crisis Period

Abstract Numerous studies have been conducted based on Okun’s Law (1962), researchers proposing various approaches, while the two most common are the difference approach, which reflects the link between the variation of unemployment rate and the output growth, and the gap approach, which shows the relationship between the deviation of the actual unemployment rate from the natural unemployment rate and the Gross Domestic Product (GDP) gap. In order to see how the relationship looks like over time and how the Okun’s coefficient varies from country to country, this study analyzes the sensitivity of unemployment at output changes while carries out a comparative analysis for Central and Eastern Europe (CEE) countries, regarding Okun's Law applicability in the post-financial crisis period, taking into consideration previous relevant researches. Therefore, the assessment is based on quarterly data, between 2010 and 2019, for unemployment and economic growth, recorded in five CEE countries, members of the Organization for Economic Co-operation and Development (OECD): Bulgaria, Czech Republic, Hungary, Poland and Romania. While the research is based both on the gap and difference method, it may lead to results sensitive to the method chosen in order to assess the unobservable variables, namely potential output and natural unemployment rate. In order to determine the structural components of the GDP and unemployment rate, it is used the Hodrick-Prescott univariate filter, applied on quarterly data. Before estimating the Okun's coefficient, the study also examines the causality relationship between unemployment and GDP using Granger causality test.

Okun’s Law: Analisis Tingkat Pengangguran Terbuka Kabupaten Banjar Ditinjau dari Perspektif Laju Pertumbuhan Ekonomi

Unemployment is one of the main problems that is very influential and is also affected by several factors that are interrelated with each other and have a close relationship with the unemployment rate; this is because the working population contributes to the production of goods and services. Based on data obtained from the Central Bureau of Statistics, it was found that in the 2018-2021 period, there was a positive relationship between economic growth and open unemployment, and there were doubts due to the rejection of previous research results, so it is possible to analyze the level of open unemployment in Banjar Regency in terms of the rate of economic growth in 2017-2022 using the Okun's Law theory approach. This research uses a quantitative method with time series analysis using simple linear regression analysis to obtain Okun's coefficient. The results found that economic growth has no significant negative effect on the unemployment rate. In addition, the insignificant value of Okun's coefficient indicates a negatively unresponsive unemployment rate in Kabupaten Banjar, and there is an insignificant negative relationship between economic growth and the open unemployment rate. Therefore, Okun's law theory is proven not to apply in the economy of Kabupaten Banjar.

OKUN`S LAW IN BOSNIA AND HERZEGOVINA (1996-2021): AN EMPIRICAL ANALYSIS OF OKUN`S COEFFICIENT VARIATIONS

Economic growth and unemployment are two macroeconomic quantities that have the greatest research interest among economists. The connection established between these two variables, which also describes their inverse relationship, is known in the literature as Okun's law. The subject of this research was to examine Okun's regularity between the movement of gross domestic product and unemployment in Bosnia and Herzegovina during the period from 1996 to 2021. We divided the observed period into two parts, and we observed the total sample, pre-crisis and post-crisis period, and we took 2008 and the economic crisis as the relevant year. The aim of the work was to quantify Okun's coefficient for the entire sample, pre-crisis and post-crisis period. The research results showed the existence of Okun's coefficient with variations of the coefficient over time. Namely, the value of the coefficient in the period from 1996 to 2008 is higher in absolute terms compared to the entire period, as well as the post-crisis period. The value of the coefficient for Bosnia and Herzegovina in the precrisis period was 0.79, and 0.66 is the calculated value of the coefficient for the post-crisis period. The coefficient value of 0.76 was calculated for the period from 1996 to 2021. From this we can conclude that the elasticity of the coefficient in Bosnia and Herzegovina is higher in the post-crisis period compared to the pre-crisis period.

Verification of Okun’s Law on Russian Data

The purpose of the study is to assess the empirical relationship between economic growth and unemployment in the Russian economy. The research methodology is based on an econometric analysis of time series representing data on unemployment and economic growth to identify an empirical relationship between these variables. In the article continued the work on identifying the relationship between the unemployment rate and GDP in Russia based on empirical data. Based on the results of the optimal length model, the long-term Okun coefficient describing the relationship between GDP and unemployment is calculated. As a result of the empirical assessment, the Okun coefficient was obtained equal to 0.87, which is consistent with previous studies based on the data of the Russian economy. The discrepancies can be explained by the pandemic factor in 2020. It is concluded that the value of the long-term Okun coefficient confirms the stable relationship between GDP and the unemployment rate. However, its value for Russia is somewhat inferior to estimates for most developed countries and is comparable to indicators for emerging market countries. The results of the study can be used in the construction of short-term forecasts of the response of unemployment to changes in GDP, as well as in the development of macroeconomic policy measures in Russia as a whole.

Testing Okun’s Law in South Africa

The purpose of this study is to see whether Okun's coefficient exists in South Africa. The study analysed yearly data from 1995 to 2020. The study used an error correction model (ECM) to assess the short-run relationship between the variables under investigation. The granger causality test is also used to examine the variables' short-run causality. According to the study's results, there is a negative and significant relationship between unemployment and GDP in the short run. As a result, Okun's Law applies in South Africa. The Granger causality test findings reveal that GDP Granger causes unemployment in South Africa. As a result, the study recommends that policymakers prioritize balancing labour-intensive and capital-intensive jobs, as well as encouraging entrepreneurship and sufficient education and training.

On the behavior of Okun's law across business cycles

As useful barometers of the macroeconomy, output and unemployment dynamics are relevant for markets, policymakers and the average economic agent. This paper relaxes the two-regime assumption of existing models of their relationship (the so-called Okun's law) motivated by a literature that documents three phases of the business cycle. Using U.S. data for 1949–2020, a threshold regression of output and unemployment is estimated, which allows for a straightforward extension of previous linear and two-regime models. The results reveal a steepening of Okun's relationship across three endogenously-determined regimes that align closely with expansions, mild recessions and deep recessions. The steepening is robust to a battery of considerations. Meanwhile, the variation in Okun's coefficient correlates with changes in the average deviation of nominal wages from the median. These findings uncover the need for differentiated policy responses across recessions.

Testing Okun's law on the relationship between employment rate and economic growth in developed and developing countriesa

Regression models for panel data are increasingly widely used in socio-economic studies because they consider the relationship between many objects over time; thus they can better measure unobservable effects. This study aims to test Okun's law on the relationship between economic growth rate and unemployment rate in two groups of countries (developed and developing). The study was conducted on panel data for the period 2008–2019 using a number of static and dynamic regression models. The model test results show that the dynamic regression model (differential general moment model, DGMM) is a more suitable model in testing the validity of Okun's law for these two groups of countries. These results show that the relationship between unemployment and economic growth in both these groups of countries is quite consistent with Okun's law, in which developing countries have a higher degree of concordance. Moreover, the group of developing countries has a larger Okun coefficient, so economic growth in this group of countries is more affected by the unemployment rate. From the obtained results, we try to explain the causes leading to this difference in this influence level , and suggest some solutions that need special attention to achieve the goal of economic growth.

Dynamic version of Okun’s law in the EU15 countries—The role of delays in the unemployment‐output nexus

AbstractThis paper estimates Okun's law in the EU15 countries between 1980 and 2018. It employs different versions with a focus on the dynamic part of the short‐run relationship. We find that the negative relationship between unemployment and output generally holds over time. However, Okun's coefficient varies substantially across countries. The dynamic version can shed light on different country estimates found in the literature. The paper argues that lag effects need to be considered to avoid possible misspecification. A mixed‐lag structure indirectly controls for potential missing explanatory variables such as the role of labour market institutions.

Analysis of the heterogeneity factors and assessment of the structural levels of inflation in Russian regions

The article analyzes the factors of deviation of regional rates of price growth from the national average and estimates the structural levels of inflation in Russian regions, which can be achieved if the Bank of Russia maintains inflation at 4%. The assessment of the structural levels of regional inflation was carried out using groupings of regions according to the degree of labor mobility, transport accessibility, sectoral specifics of the economy, the share of social transfers in the population’s income, and the region’s affiliation with the federal district. The greatest significance was shown by such factors of heterogeneity of regional inflation as the volume of lending to individuals, the level of price rigidity, inflationary expectations and the nominal effective exchange rate of the ruble. In addition, for each Russian region, an assessment of labor mobility was given through the Okun coefficient. It is concluded that the Balassa—Samuelson effect in the long-term period is a significant factor in inflation heterogeneity only in regions with high labor mobility. The results of assessing the structural levels of regional inflation can be taken into account in the development of monetary policy and in the implementation of the information policy of the Bank of Russia.

Labor Market Informality and the Business Cycle

Labor market informality is a pervasive feature of most developing economies. Motivated by the empirical regularity that the labor informality rate falls with GDP per capita, both at business cycle frequency and in a cross-section of countries, and that the Okun's coefficient falls with the level of labor informality, we build a small open-economy dynamic stochastic general equilibrium model with two sectors, formal and informal, which can replicate these key stylized facts. The model is calibrated to Colombia. The results show that labor market and tax reforms play an important role in changing the informality rate but also caution against over-optimism - with low GDP per capita, informality will always be relatively high as there is insufficient demand for formal goods. Quantitatively we find that higher productivity in the formal sector is key in explaining the difference between Colombia and countries with significantly lower informality. We use the model to study how labor informality and labor market frictions mediate the cyclical response of the economy to shocks, including commodity price shocks which are particularly relevant in Latin America. Informality is shown to play an important role as a shock absorber with the informal-formal margin limiting movements in the employed-unemployed margin.

Labor Market Informality and the Business Cycle

Labor market informality is a pervasive feature of most developing economies. Motivated by the empirical regularity that the labor informality rate falls with GDP per capita, both at business cycle frequency and in a cross-section of countries, and that the Okun's coefficient falls with the level of labor informality, we build a small open-economy dynamic stochastic general equilibrium model with two sectors, formal and informal, which can replicate these key stylized facts. The model is calibrated to Colombia. The results show that labor market and tax reforms play an important role in changing the informality rate but also caution against over-optimism - with low GDP per capita, informality will always be relatively high as there is insufficient demand for formal goods. Quantitatively we find that higher productivity in the formal sector is key in explaining the difference between Colombia and countries with significantly lower informality. We use the model to study how labor informality and labor market frictions mediate the cyclical response of the economy to shocks, including commodity price shocks which are particularly relevant in Latin America. Informality is shown to play an important role as a shock absorber with the informal-formal margin limiting movements in the employed-unemployed margin.

Stability and asymmetry in Okun’s law: Evidence from Spanish regional data

This paper analyzes Okun?s Law for Spain using regional data. The results confirm a very high Okun coefficient for Spain, with a high degree of regional heterogeneity. Furthermore, we find that panel data techniques provide notably more stable estimates than time series techniques applied to the same regional data. Finally, the results reveal a remarkable degree of regional heterogeneity in cyclical asymmetry in Okun?s Law for the Spanish case.

Relationship between Youth Unemployment and Economic Growth in Kenya

Youth employment opportunities have been the priority by the Kenyan Government over the past years, and various policies have been implemented to assure the employment opportunities growth. Economic growth is reckoned to be essential since a positive growth rate will encourage inward investment and improve revenues, which can be spent on long-term public sector works. However, youth unemployment is a consistent problematic element in Kenya, affecting the economy to a large extent. The general objective of this study is to examine the relationship between youth unemployment and economic growth in Kenya. The specific objectives of the study are to investigate the causal relationship between youth unemployment and economic growth in Kenya and to analyze the effect of economic growth on youth unemployment in Kenya. The theories studied include the theory of surplus-value, Solow-swan model, Okun's law, and Keynesian theory, which explain the aspects of unemployment and economic growth. Secondary data was collected and used to illustrate the relationship between the variables, while the methodology used was the Granger causality test and OLS. A unidirectional causal relationship existed linking the two variables, where the lags of economic growth granger cause youth unemployment, and the coefficient between the two variables was positive. Hence Okun's law coefficient didn't apply when it comes to youth unemployment as opposed to the overall unemployment. However, the coefficient was statistically significant.

On the Behavior of Okun's Law across Business Cycles

Using threshold regression analysis, this paper estimates a three-regime Okun's relationship (between U.S. output and unemployment) and shows that two-regime models are insufficient to account for all of its variation during 1949-2020. The sensitivity of unemployment to output is found to increase as the unemployment rate rises across endogenously estimated thresholds (5.11 and 7.41 percent), defining periods that align closely with expansions, mild recessions and deep recessions. The results are remarkably robust to a battery of different considerations. Meanwhile, the variation in Okun's coefficient is found to closely correlate with changes in the average deviation of nominal wages from the median, suggesting nominal wage rigidity as a possible economic explanation to the nonlinearity. These findings uncover the need for more vigorous policy actions during periods of low unemployment, targeted policies that address the underlying reasons behind nominal wage rigidities and differentiated responses across recessionary periods.

Sectoral Okun's Law and Cross-Country Cyclical Differences

We estimate Okun's law, the negative relationship between output and the unemployment rate, at the sector level for the US, the UK, Japan, and Switzerland to test several hypotheses that may explain why the aggregate Okun's coeffcients are different across countries. Specifically, we show that the sectoral composition is not a driver and find that the sectoral coefficients are proportional to the aggregate in all four countries. We also show that the standard deviation of unemployment is the main driver of the cross-country differences. This is consistent with labor market policies being crucial to explain the cross-country cyclical differences in the aggregate Okun's coefficient.

Beyond Okun’s law: output growth and labor market flows

This paper studies the relationship between the change in the unemployment rate and output growth using an approach based on labor market flows. The framework shows why the Okun coefficient may be constant/time varying and/or symmetric/asymmetric and that the outcome depends upon the behavior of the labor flows in response to growth. The encompassing framework nests the conditions to determine the properties of the Okun coefficient without the need to rely on retrospective arbitrary dating of recessions. The framework also highlights the potential misspecification in conventional models of Okun’s Law unless stringent conditions are assumed about the behavior of labor flows. The empirical analysis is based on the stock-consistent labor market flows data developed by the Bureau of Labor Statistics for the period 1990:2–2017:3.

Does One Law Fit All? Cross-Country Evidence on Okun’s Law

This paper compares the performance of Okun’s Law in advanced and developing economies. On average, the Okun coefficient—which measures the short-run responsiveness of labor markets to output fluctuations—is about half as large in developing as in advanced countries. However, there is considerably heterogeneity across countries, with Okun’s Law fitting quite well for a number of developing countries. We have limited success in explaining the reasons for this heterogeneity. The mean unemployment rate and the share of services in GDP are associated with the Okun coefficient, whereas other factors such as indices of overall labor and product market flexibility do not appear to play a consistent role.

Do IMF forecasts respect Okun’s law? Evidence for advanced and developing economies

This paper provides an assessment of the IMF’s unemployment forecasts, which have not received much scrutiny to date. The focus is on the internal consistency of the IMF’s growth and unemployment forecasts, and specifically on seeing whether the relationship between the two is consistent with the relationship in the data, i.e., with Okun’s Law. We find that the average performance is good, in the sense that the relationship between growth and unemployment forecasts is fairly comparable to that which prevails in the data: on average, the Okun coefficient in the forecasts mirrors the Okun coefficient in the data. Nevertheless, there is room for improvement, particularly in the year-ahead forecasts and for the group of middle-income countries. We show that a linear combination of Okun-based unemployment forecasts and WEO unemployment forecasts can deliver significant gains in forecast accuracy for developing economies.

Hukum OKUN: Pertumbuhan Ekonomi dan Tingkat Pengangguran di Indonesia

This study examined the validity of Okun's Law on the Indonesian economy by using the difference version of Okun's Law to obtain the Okun coefficient. This study uses the analysis of the Autoregressive Distributed Lag Model (ARDL). The estimation results concluded that Okun's Law proved to have a negative and significant effect on the Indonesian economy because the variable economic growth was shown to influence the unemployment variable statistically.