Okun's Relationship Research Articles

ESTIMATING OF OKUN'S RELATIONSHIP IN IRAQI AGRICULTURAL SECTOR FOR THE PERIOD 1998-2019 USING BOOTSTRAP ARDL METHODOLOGY

This study was aimed to test the relationship between the unemployment rate and agricultural growth rates in the agricultural sector of Iraq according to Okun's Law for the period 1998-2019. The differences and gap versions of Okun's Law for the relationship was conducted, Alongside with Hodrick-Prescott (HP) filter to find the potential production and the Baxter-King (BK) filter to find the trend of unemployment for the agricultural sector, and then to find production and unemployment gaps. Bootstrapping method was used to generate data because the lack of data and Augmented ARDL to identify the cointegration. The result of independent-F test at the level was insignificant with a value of 1.49 for the differences model, that is less than the critical value which is 9.26 of the 0.05 level of significance. While the result of independent-F test at the level of the gap model was 1.89, which is less than the critical value which is 12.8 at 0.05 the level of significance. Thus, confirming the absence of a co-integration relationship between the two variables. This result confirms the complete absence of Okun's relationship with the two versions in the Iraqi agricultural sector.

Does Okun's law suffer from COVID-19?

We analyse the effect of COVID-19 on the Okun's law relationship for several EU countries and the US. Results are based on regressions and a systematic DF-Beta analysis. Our results indicate that the year 2020 is an outlier in the Okun relationship. However, the direction of change is different in the European countries compared to the US.

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.

Estimation de la loi d'Okun avec le modèle ARDL

This pepper proposes estimates of verification of Okun’s law for developed and developing countries, namely: France, Italy, Spain, Morocco, Tunisia, Egypt and South Africa, over a period that lasts from 1991-2020 for the two variables: Growth rate and Unemployment rate. Indeed, the existence of a linear relationship by the ARDL model for all the countries except for Italy, as well as the Okun relationship is accepted.

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.

New insights into the nonlinearity of Okun's law

We estimate Okun's relationship for four European countries (France, Germany, the Netherlands and Spain) with a nonparametric procedure, without imposing a previous specific functional form. We apply the non parametric MARS methodology that endogenously detects multiple thresholds and therefore is able to identify multiple possible regimes. In addition, we control for the Euro area crisis to capture possible effects of the economic activity of neighbour countries on domestic unemployment rate variations. Our results confirm the existence of two regimes in each country but significantly different thresholds across countries. The form of Okun's relationship for Germany, France and the Netherlands are similar and quite different from Spain where it is much steeper. Differences between Okun coefficients below and above the threshold are consistent with the “firm's risk aversion hypothesis”, but different thresholds across countries may be related to the “labour hoarding hypothesis”. The negative value of the threshold in Spain may reflect the “institutional rigidity hypothesis”. Finally, the fact that the Euro area crisis may affect the domestic Okun's law is consistent with decision makers with risk aversion who use information from the economic area they are operating in. These results not only potentially enrich Okun's law estimations but also open the debate over how the different theoretical hypothesis intervene and shape Okun's law for each country.

Revisiting the Okun relationship

ABSTRACTOur article revisits the Okun relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985–2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers but also it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate but it will also have the distributional effect of lowering youth unemployment.

The pyramid of Okun’s coefficient for Italy

Our aim is to develop a pyramid of Okun's coefficient by age and gender in the Italian labour force using a varying-coefficient model. The unemployment rate by age and gender -- useful information for estimating Okun's relationship -- is not available for Italy from official statistics. Therefore, we provide an estimation of the indicator using microdata for the 2005-2014 period from ISTAT, the Italian labour force survey. Okun's law is investigated using two measures of the unemployment rate: a traditional measure based on a labour force with and without work experience, and a new measure restricted to the labour force with experience. When Okun's relationship is estimated using the unemployment rate restricted to the labour force with experience, the young population is less sensitive to business cycles. As the workforce ages, this gap in sensitivity tends to shrink, particularly in that segment of the workforce more than 30 years of age. We also found that there are no significant differences by gender in the magnitude of Okun's coefficient among the youngest population when considering the unemployment rate restricted to the labour force with experience.

Revisiting Okun's Relationship

Our paper revisits Okun's relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985-2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers, it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate, it will also have the distributional effect of lowering youth unemployment.

Revisiting Okun's Relationship

Our paper revisits Okun's relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985-2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers, it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate, it will also have the distributional effect of lowering youth unemployment.

Revisiting Okun's Relationship

Revisiting Okun's Relationship

Regional growth and unemployment in the medium run: asymmetric cointegrated Okun’s Law for UK regions

This article tests for the presence of a medium-run asymmetric Okun’s Law relationship between regional output and regional unemployment rate in UK regions. The test is performed with a panel data version of the hidden cointegration technique suggested by Granger and Yoon. A novelty of the article is to combine the method of hidden cointegration with a panel data method of removing cross-sectional dependence. The medium-run Okun relationship for regions in the UK appears to confirm results found elsewhere in the literature on countries as a whole, although the coefficients tend to be smaller.

Unemployment in the Great Recession: A Comparison of Germany, Canada, and the United States

This paper looks at the surprisingly different labor market performance of the United States, Canada, Germany, and several other OECD countries during and after the Great Recession of 2008–9. A first important finding is that the large employment swings in the construction sector linked to the boom and bust in US housing markets is an important factor behind the different labor market performances of the three countries. We also find that cross-country differences among OECD countries are consistent with a conventional Okun relationship linking gross domestic product growth to employment performance.

Disaggregating Okun's Law: Decomposing the Impact of the Expenditure Components of GDP on Euro Area Unemployment

This paper examines the usefulness of the Okun relationship as a “rule of thumb” for predicting changes in unemployment, as a result of changes in output. It argues that a disaggregated version of the Okun relationship - making use of the differential reaction of unemployment to changes in the various expenditure components of GDP - significantly enhances the capacity of the Okun relationship (in comparison to the aggregate “rule of thumb”) for predicting movements in unemployment. The paper tests this hypothesis using a dataset for the 17 euro area countries over the period 1996Q1-2013Q4. The results suggest that euro area unemployment is particularly sensitive to movements in the consumption component of GDP, while movements in foreign trade (exports and imports) have a much lower impact on unemployment developments. This reflects the highly labour-intensive nature of the services that represent the bulk of consumers’ expenditure, while the higher productivity manufacturing-related content of exports tends to be less labour intensive.

Impacts of Intangible Assets on Regional Growth and Unemployment

The paper studies the impact of intangible assets on economic growth and unemployment from a regional perspective. The familiar relationship between changes in the unemployment rate and economic growth – known as Okun’s law – is taken as a workhorse of the analysis and estimated for the 27 EU-member countries at the NUTS 1 level. The results establish Okun’s law as a firm relationship to describe the growth-uemployment nexus. However, the analysis reveals substantial heterogeneities across the regions. In fact, the law is more inline with the regions of the old EU-member states. Similarly in Germany a significant East-Westdivide is observable. In addition there seems to be a separation between Northern and the Southern European regions. Therefore, the model is extended by including spatial effects to identify if there are significant spillovers, and whether they have changed over the integration process. Our findings confirm the hypothesis that spatial dependencies matter for the Okun relationship. The evidence is based on the spatial error and the spatial lag model although the former has a slightly better performance than the latter alternative. Due to the high regional aggregation level direct neighbourhood effects are dominant The importance of spatial effects has risen over time, i.e. the economic development has become more similar in the integration process. For less advanced regions regional economic growth and unemployment do not depend on intangible assets.

Regional Growth and Unemployment: The Validity of Okun's Law for the Finnish Regions

This paper offers a concise critical overview of Okun's Law, with particular attention for its relevance in open economic systems of regions. Based on an extensive set of economic data for Finnish regions, the existence of cointegration is tested using alternative statistical methods, viz. the residual-based test and the conditional error correction model. A novelty of the paper is to combine a method of hidden cointegrations with a method of removing cross-sectional dependence. After correcting for hidden cointegrations and cross-sectional dependence, both statistical methods used yield almost similar results and confirm the presence of cointegration for the relevant data on Finnish regions. The long-run Okun relationship for regions in Finland appears to confirm results found elsewhere in the literature on countries as a whole, although the coefficients tend to be smaller. RÉSUMÉ Cette communication présente un aperçu critique concis de la loi d'Okun, et se penche tout particulièrement sur sa pertinence éventuelle pour les systèmes économiques ouverts dans les régions. Sur la base d'un ensemble de données économiques approfondies concernant les régions finnoises, on procède à des essais de l'existence d'une co-intégration, en appliquant des méthodes statistiques alternatives, à savoir les essais à base résiduelle et le modèle de correction des erreurs conditionnelles. Une nouveauté contenue dans cette communication est la combinaison d'une méthode de co-intégrations cachées avec une méthode d’élimination de la dépendance transversale. Après des corrections tenant compte des co-intégrations cachées et de la dépendance transversale, les deux méthodes statistiques utilisées produisent des résultats similaires, et confirment la présence d'une co-intégration pour les données relatives aux régions finnoises. Les rapports de longue durée de la loi d'Okun appliquée aux régions de la Finlande semblent confirmer les résultats relevés ailleurs dans la documentation générale sur les pays, même si les coefficients ont tendance à être plus petits. EXTRACTO Este estudio ofrece una perspectiva general concisa y crítica de la ley de Okun, prestando particular atención a su relevancia en sistemas económicos abiertos regionales. En base a un conjunto amplio de datos económicos sobre regiones finlandesas, se pone a prueba la existencia de cointegración utilizando métodos estadísticos alternativos, tales como, el ensayo basado en residuales y el modelo condicional de corrección de errores. Una de las novedades del estudio es que combina un método de cointegraciones ocultas con un método de eliminación de dependencia cruzada. Después de hacer correcciones para las cointegraciones ocultas y la dependencia cruzada, ambos métodos estadísticos producen resultados casi similares y confirman la presencia de cointegración en los datos oportunos sobre regiones finlandesas. La relación Okun a largo plazo de regiones en Finlandia parece confirmar los resultados encontrados en otras partes de la bibliografía sobre países enteros, aunque los coeficientes tienden a ser menores.

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.

A flexible nonlinear inference to Okun's relationship

The study implements the flexible nonlinear inference approach of Hamilton (2001) to assess the validity of Okun's law. Using US quarterly data from 1948:1 to 2004:2, overwhelming evidence is found of nonlinearity between cyclical components of unemployment and output. However, the relationship is still negative and provides strong support of (nonlinear) Okun's law.

An examination of Okun's law: evidence from regional areas in Greece

This paper estimates Okun's coefficient for certain regional areas in Greece over the period 1960–1997. Through the Hodrick-Prescott filtering and the band-pass filtering the empirical analysis shows that that the coefficients do not exhibit substantial interregional differences, except for the cases of Epirus and North Aegean Islands. In these two cases, the estimates are larger than the regional average under both detrending methodologies. The empirical findings also show that Okun's relationship undergoes a structural change in 1981. After this break, unemployment becomes less responsive to output changes in all regional areas.

The robustness of Okun's law: Evidence from OECD countries

This paper evaluates the robustness of the Okun relationship based on postwar data for 16 OECD countries. While Okun's law is statistically valid for most countries, the quantitative as opposed to qualitative estimates are far from uniform. Estimates are also sensitive to the choice of models, including the first-difference and the “gap” specifications, the relevant data for the latter are constructed alternatively from the HP filter, the Beveridge-Nelson decomposition procedure, and the Kalman filter based on the NAIRU framework. There is mixed evidence of asymmetric behavior, but strong evidence of structural breaks occurring around the 1970s, after which time most countries began to experience a smaller output loss associated with higher unemployment.