Okun's Coefficient Research Articles

Okun's Law in Australia

This paper examines the dynamic behaviour of the Okun coefficient using quarterly data (1980Q3–2014Q1). It is found that a rise in labour productivity and a fall in output can increase unemployment. A 1 per cent reduction in the unemployment rate requires only a 2.4 per cent increase in real output growth above the average growth rate, but during recessions this figure increases to 4.53 per cent. The probability of observing a higher coefficient was limited to recessionary periods. Given that recessions are now less frequent, Okun's law continues to be a useful rule of thumb in Australia.

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

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.

Commuting effects in Okun's Law among British areas: Evidence from spatial panel econometrics

AbstractThis paper examines Okun's Law using a spatial panel approach on NUTS 3 data for Great Britain over the period 1985–2011. The basic specification used as a starting point for the spatial analysis is the relationship between real output growth and unemployment rate changes. This is extended to incorporate spatial lags, to test for the presence of commuting effects, and to accommodate spatial residuals dependence. We estimate various spatial panel models, controlling for heterogeneity across areas, and find consistent evidence of a significant Okun's coefficient. Results also show that spillover effects from labour mobility and interregional linkages matter and have important implications for the validity of the empirical law.

Econometric Estimation of the Relationship between Unemployment Rate and Economic Growth of FYR of Macedonia

This study aims to estimate empirically the relationship between economic growth and unemployment rate in FYR of Macedonia applying the Okun's Law. For analyzing the Okun's coefficient are used four types of models such that, the difference model, the dynamic model, ECM, and VAR estimation approach, in order to consider both, the short term and the long term possible relationship. The analysis consists on quarterly data covering the period 2000-2012. The empirical results from all models do not indicate robust evidence and do not confirm an inverse linkage between unemployment rate and economic growth, as the Okun's Law suggests. Based on the VAR methodology and Engel-Granger cointegration test, it doesn’t exist a causal relationship between these two variables and a change in the growth rate of real GDP doesn’t cause a change in the rate of unemployment and vice-versa. The main reasons that go far to explain the regression outputs are: first, the large informal employment that accounts at about one fourth of total employment and second the structural unemployment. The study also highlights that the country's economic policies have not been suitable for fostering development and reducing unemployment, as the primary source of employment is the public sector rather than the private sector.

Do forecasters believe in Okun’s Law? An assessment of unemployment and output forecasts

This paper provides an assessment of the consistency of unemployment and output forecasts. We show that, consistent with Okun’s Law, forecasts of real GDP growth and the change in unemployment are negatively correlated. The Okun coefficient—the responsiveness of unemployment to growth—from forecasts is fairly similar to that in the actual data for various countries. Furthermore, revisions to unemployment forecasts are negatively correlated with revisions to real GDP forecasts. These results are based on forecasts taken from Consensus Economics for nine advanced countries since 1989.

Okun's Law—a Meta‐analysis

This paper seeks to identify whether there is a representative empirical Okun's law coefficient (OLC) and to measure its size. We carry out a meta‐regression analysis on a sample of 269 estimates of the OLC to uncover reasons for differences in empirical results and to estimate the ‘true’ OLC. On statistical (and other) grounds, we find it appropriate to investigate two separate subsamples, using respectively (some measure of) unemployment or output as dependent variable. Our results can be summarized as follows. First, there is evidence of type II publication bias in both subsamples, but a type I bias is present only among the papers using some measure of unemployment as the dependent variable. Second, after correction for publication bias, authentic and statistically significant OLC effects are present in both subsamples. Third, bias‐corrected estimated true OLCs are significantly lower (in absolute value) with models using some measure of unemployment as the dependent variable. Using a bivariate MRA approach, the estimated true effects are −0.25 for the unemployment subsample and −0.61 for the output subsample; with a multivariate MRA methodology, the estimated true effects are −0.40 and −1.02 for the unemployment and the output subsamples respectively.

The Diversity of Okun's Coefficient in the Regions of Poland

In the paper we calculate the Okun's coefficient in the regions of Poland. We compare the coefficients calculated for each region separately with the estimations from seemingly unrelated regressions (SUR) models. We argue that the second method gives a better estimate, because shocks in output are highly correlated across regions. Then we search in the Polish regions for the clubs consisting of regions with equal Okun's coefficients, what indicates the similarity in the macroeconomic structure and labor market. We find two such clubs: northwest of Poland and the eastern border. Finally, we draw some conclusions concerning economic policy in working against unemployment.

Do Forecasters Believe in Okun’s Law? An Assessment of Unemployment and Output Forecasts

This paper provides an assessment of the consistency of unemployment and output forecasts. We show that, consistent with Okun’s Law, forecasts of real GDP growth and the change in unemployment are negatively correlated. The Okun coefficient—the responsiveness of unemployment to growth—from forecasts is fairly similar to that in the data for various countries. Furthermore, revisions to unemployment forecasts are negatively correlated with revisions to real GDP forecasts. These results are based on forecasts taken from Consensus Economics for nine advanced countries since 1989.

The Relationship Between Unemployment and Output in Egypt

Okun's law is a key relationship in microeconomics and finds that the relationship implies that a GDP growth by 3% leads to 1% decrease in unemployment Okun (1970). Recently, many studies find that the relationship between GDP and unemployment is not 3% as Okun's law suggests but sometimes it is between 2.5% and 2% (Samuelson and Nordhaus, 1995). This paper tests Okun's coefficient in Egypt. The paper uses co-integration analysis to estimate Okun's coefficient in the long run. and in the short run by using the Error Correction Mechanism (ECM). The analysis depends on annual data from the International Financial Statistics (IFS) published by the IMF for the period 1970-2010. When Okun's law was estimated in Egypt in the long run and short run the coefficient was statically significant with the expected sign.

Pengaruh Pertumbuhan Ekonomi terhadap Tingkat Pengangguran: Analisis Hukum Okun

The concept of a negative relationship between economic growth (Gross Domestic Product) and unemployment rate is known as Okun's law (Okun's Law) or the Okun coefficient. The application of Okun's law in Indonesia uses time series data from 1999 to 2013. The method used is the difference version of Okun's law to gain Okun coefficient and Ordinary Least Square (OLS) analysis to obtain the regression coefficients. In a macro-economic framework, Okun's law states that if the GDP grows at 2.5% above the trend, which has been achieved in a given year, the unemployment rate will fall by 1 %. From various studies conducted by several researchers can be seen that the Okun coefficient in each different country. In Indonesia, the scientific literature that specifically raised the Okun's law does not available, so the study aims to look at how the application of Okun's law in Indonesia The results showed that Okun's law applies in Indonesia, where the Okun coefficient is negative. The unemployment rate tends to increase in line with GDP growth reached.

Economic Growth and Regional Labor Market Development in German Regions: Okun's Law in a Spatial Context

The inverse relationship between economic growth and labor market developments in the form of changes in the unemployment rate is known in economic literature as Okun’s law. The objectives of this paper are to estimate a regionalized Okun coefficient and its associated (regional) unemployment thresholds. The suitability and limitations of Okun’s law as a rule of thumb for regional economic growth and labor market policy are also discussed. Motivated by “Germany’s Jobs Miracle” in face of the economic crisis of 2008 and 2009, the existence of an uncoupling effect between economic and unemployment growth is questioned and whether regional economic growth is a driving force for regional labor market development. A regional dataset for the years 2002 to 2009 is employed for this study. The spatial dimension is pursued in two ways: a non-parametric approach using functionally defined labor markets as study areas and the application of spatial econometric panel data models, in particular the Spatial Durbin Error Model. The rationale is that functionally defined regional study areas are the appropriate spatial reference level for the analysis. It is found that, without accounting for spatial dependence, regionalized Okun coefficients are likely to be overestimated. The empirical results confirm a positive impact of economic growth on labor market performance; however, the estimated effect of regional economic growth is far lower than would have been expected. The paper illustrates the limited transferability of Okun’s law as a rule of thumb for growth dynamics on a regional level as well as limitations of regional growth dynamics for regional labor market development.

ROLLING REGRESSION VERSUS TIME‐VARYING COEFFICIENT MODELLING: AN EMPIRICAL INVESTIGATION OF THE OKUN'S LAW IN SOME EURO AREA COUNTRIES

ABSTRACTDuring the last decade, economists have shown that the inverse relationship between economic growth and unemployment rate varies over time. Rolling regression has been the main tool used to quantify such a relationship. This methodology suffers from several well‐known problems which lead to spurious non‐linear patterns in the Okun's coefficient behaviour over time. Here, we take a penalized regression spline approach to estimate the Okun's time‐varying effects. As a result, spurious non‐linearities are suppressed and hence important time‐varying coefficient features revealed. Our empirical results show that the inverse relationship in some Euro area countries is spatially heterogeneous and time‐varying. The findings are complemented by the calculation of the rate of output growth needed for a stable unemployment rate, as proposed by Knotek.

The endogeneity of the natural rate of growth in the regions of Italy

Following León‐Ledesma and Thirlwall (2002a), this paper examines the hypothesis that the natural rate of growth of the Italian regions is endogenous to and positively affected by the actual growth rate. Relying on fixed‐effects and SUR estimation techniques and using annual data for the 20 Italian regions over the period 1977–2003, we find strong support for the endogeneity hypothesis suggesting that faster actual growth raises the natural rate of growth of the average Italian region by about 3–3.7 percentage points. Furthermore, in line with recent findings in the literature, our analysis provides evidence of asymmetries in Okun’s Law. In particular, the asymmetric Okun coefficient in the high‐growth regime turns out to be positive in several cases, implying the unemployment rate may become pro‐cyclical when actual growth rises above a certain threshold rate.

Bayesian estimation of the Okun coefficient for Romania

In this paper I use a New Keynesian model with unemployment and estimate it for the Romanian economy using Bayesian techniques. I use the estimated model to derive an estimation of the Okun coefficient. I alternatively estimate the Okun coefficient using the Bayesian linear regression. The results show that the Okun coefficient is high in the Romanian economy implying that the current crisis will have a severe impact on the labour market as well as important social effects.

Puzzles, Paradoxes, and Regularities: Cyclical and Structural Productivity in the United States (1950–2005)

Changes in labor productivity have been a source of puzzlement and paradoxical results for economists. We suggest that puzzles and paradoxes vanish once two simple regularities are properly acknowledged. Okun's and Verdoorn's laws explain 87 percent of all the variations in labor productivity. Also, our estimation method and our results suggest that conventional measures of Okun's Law have overestimated the value of the Okun coefficient, and accepted a greater degree of variability than is actually guaranteed by the empirical evidence. Okun's Law has been relatively stable through time, and there has been no significant decrease in the value of the parameter since the 1960s.

CYCLICAL UNEMPLOYMENT AND CYCLICAL OUTPUT: AN ESTIMATION OF OKUN'S COEFFICIENT FOR SOUTH AFRICA

AbstractPersistently high unemployment in South Africa, especially in the face of improved economic conditions since 1994, begs the question: Does unemployment in South Africa respond to changes in output? Okun's law refers to the inverse relationship that exists between cyclical output and cyclical unemployment. This paper estimates Okun's coefficient for the South African economy, using annual data from 1970‐2005. Output and unemployment are decomposed into their trend and cyclical components, using a variety of detrending methods. The presence of structural breaks in Okun's relationship is also investigated, while cointegration analysis was also considered. Evidence of a statistically significant relationship between cyclical output and cyclical unemployment are found in both symmetric (estimates range from −0.77 to −0.16) and asymmetric (estimates range from −0.77 to −0.18) specifications of Okun's law, irrespective of the detrending technique. However, cyclical unemployment constitutes only a relatively small fraction of total (observed) unemployment, which implies that a more expansionary macroeconomic policy stance might only have a limited impact on total unemployment in South Africa.

Romer revisited: long-term changes in the cyclical sensitivity of unemployment

In this paper we employ microeconomic evidence on the unemployment experiences of American males to evaluate the sensitivity of unemployment to business cycle fluctuations in the late nineteenth century as compared to the mid-twentieth century. Our results indicate a substantial decline in the value of the Okun coefficient (from −0.65 to −0.32) between the 1890s and the 1960s. These findings challenge Christina Romer’s interpretation that the measured decline in cyclical volatility of unemployment over the twentieth century was created by improvements in the statistical record. Rather, it was changes in the underlying dynamics of the labor market over the cycle, most notably the transition to procyclical productivity patterns and the shift from an added to a discouraged worker effect among secondary workers, which may be summarized as the development of modern labor market behavior, that account for the declining cyclical sensitivity of employment and the drop in the cyclical volatility of unemployment over the century.

A cross-country analysis of the Okun's Law coefficient convergence in Europe

The paper examines whether or not evidence is consistent with convergence of the Okun's Law coefficient (OLC) among several alternative groupings of European economies. A two-step empirical strategy is employed. The first step obtains rolling regression estimates of the OLC for individual European countries. The second step examines how the cross-country variance of the OLC evolves over the decade until 2002 in the selected country groupings. Evidence is found consistent with convergence of the OLC among northern European countries, and among countries with centralized wage bargaining, but an absence of convergence in other country groups.

A cross-province comparison of Okun's coefficient for Canada

This study estimates Okun's coefficients for ten Canadian provinces using real GDP and unemployment rate data across the provinces. An average estimated Okun's coefficient of −1.58 is obtained under the Hodrick-Prescott detrending method and −1.32 under the quadratic detrending method. There is relative stability of the coefficients across the two detrending methods. Generally, the cost of unemployment in terms of the loss in real GDP is higher in the bigger and more industrialized provinces ranging from −2.14 for Ontario to less than −1 for the Maritime provinces.

MATCHING, BARGAINING, AND WAGE SETTING IN AN EVOLUTIONARY MODEL OF LABOR MARKET AND OUTPUT DYNAMICS

In this paper, we present an agent-based, evolutionary, model of output- and labor-market dynamics. Firms produce a homogeneous, perishable good under constant returns to scale using labor only. Labor productivities are firm-specific and change stochastically due to technical progress. The key feature of the model resides in an explicit microfoundation of the processes of : (i) matching between firms and workers, (ii) job search, (iii) wage setting, (iv) endogenous formation of aggregate demand, and (v) endogenous price formation. Moreover, we allow for a competitive process entailing selection of firms on the basis of their revealed competitiveness. Simulations show that the model is able to robustly reproduce Beveridge, Wage and Okun curves under quite broad behavioral and institutional settings. The system generates endogenously an Okun coefficient greater than one even if individual firms employ production functions exhibiting constant returns to labor. Monte Carlo simulations also indicate that statistically detectable shifts in Okun and Beveridge curves emerge as the result of changes in institutional, behavioral, and technological parameters. Finally, the model generates sharp predictions about how system parameters affect aggregate performance (i.e. average GDP growth) and its volatility.