On the Time‐Varying Relationship between Unemployment and Output: What shapes it?

This paper revisits, by means of both time series and panel data analyses, the empirical regularity popularized by Okun's (Proc Bus Econ Sect, 98‐103, 1962) seminal paper focusing on a sample of 20 advanced economies between 1978 and 2015. Not only do we provide arguably better estimates of the Okun's Law coefficient (OLC) (using the gap version) by employing a new filtering technique, but more importantly, we also contest the hypothesis that the OLC has been static over time. By estimating country‐specific time‐varying Okun coefficient models, we confirm that the unemployment‐output responsiveness has been changing over time. The dispersion between countries’ OLCs has been determined by some (structural) characteristics. The starting level of unemployment and the phase of the business cycle increase the estimated OLCs, while informality and certain labour and product market policies lower them. Our evidence sustains the fact that aggregate demand policies aiming at increasing output growth can equally contribute to the recovery in labour markets.     

The Relationship Between Output Growth and Unemployment: A Re-examination of Okun's Law in Australia

In this article, we investigate the questions of whether some form of Okun's Law holds for Australia, and if so whether the Okun relationship has been stable. The results indicate that alternative formulations of the ‘law’ do not give rise to numerically similar parameter estimates. Nevertheless, one of these formulations yields estimates which appear to be both plausible and consistent with results from previous analyses. This particular formulation suggests that Okun's relationship in Australia underwent a structural change around 1974. The parameter estimates obtained can be regarded as rules of thumb which may be useful in discussing broad consequences of policy actions.     

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.     

Can the baseline search and matching model quantitatively explain Okun’s law?

Okun’s Law is an empirically observed, negative relationship between changes in an economy’s unemployment rate and its growth rate of output. The baseline search and matching model with stochastic labour productivity fails to match the Okun’s coefficient, because it generates a too low unemployment volatility and a too high correlation between labour productivity and unemployment. The model is capable of matching the coefficient if it is extended with an addition of employment separation shocks plus a high calibrated value of nonmarket activities. This article also shows that changes in the stochastic properties of exogenous shocks could explain changes in the Okun’s coefficient in the Great Moderation (1984–2007).     

Do gender and age impact the time‐varying Okun's law? Evidence from South Korea

This study investigates the time‐varying Okun's law for different age and gender cohorts in South Korea over the 1980–2014 period. We found that the absolute value of the estimated Okun coefficients for all age cohorts and both genders become larger in a recession than in an expansion. We also found that the youth cohort (15–24 years old) for both genders is more sensitive to a negative economic impact than are older cohorts. These differences imply that when policymakers try to find a way of reducing the unemployment rate, they should consider differences in behaviour among these groups. Furthermore, the policies should be combined with age‐specific policies.     

A generalized Okun's Law: Uncovering the myth of China's labor market resilience

A stable labor market is a policy priority for most countries, especially after the burst of the global financial crisis. Unlike most countries, the labor market in China appears to be holding up well, despite sharp slowdown in economic growth. This paper argues that there are underlying fundamental mechanisms that help explain the resilience of China's labor market. The key to understanding labor market dynamics in China is that rural‐to‐urban migrant flows are more sensitive to growth than urban workers in the process of fast urbanization, which serves as a main shock absorber to buffer employment against adverse shocks. Therefore, we propose a generalized Okun's Law (GOL) that incorporates migrant flows with unemployment rates to capture the relation between labor market dynamics and economic cycles. The original Okun's Law can be regarded as a special case of the GOL for developed countries that have already completed urbanization. Conducting empirical analysis with both China's national‐ and city‐level data and cross‐country panel data, we find strong evidence supporting the GOL theory. Findings in the paper have implications for a deeper understanding of the wisdom of Okun's Law and its application in labor market policies.     

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.     

Changes in cyclical patterns of the USA labor market: from the perspective of nonlinear Okun’s law

The validity of Okun’s law has been debated because of the increase in cyclicality in aggregate hours after 1985. To investigate this, I measure Okun’s coefficients in three phases of the business cycle – recession, early, and late expansions. I found that an increased coefficient for aggregate hours is due to the increased responsiveness of the employment rate during late expansions and to the increased responsiveness of hours per employee during early expansions. These findings question the flexible labor market hypothesis focusing on firms’ firing behaviors during recessions. Rather, working hours’ flexibility represents a more prominent feature of the post-1985 USA labor market.     

Alleged instability of the Okun's law relationship in Australia: an empirical analysis

The determinants of the long run equilibrium unemployment rate are modelled through a cointegrating regression. The residual term, which represents the error correction mechanism, is used in the testing of a general dynamic model to obtain a simplified representation of the data generation process over the period 1968(2)–1989(2). The long period equilibrium unemployment rate, which is I(1), is shown to be related to the rate of capacity utilization, a structural change variable and the rate of capacity growth. Steady state rates of unemployment are calculated which are based on different assumptions about the magnitudes of the independent variables. In contrast to the other two variables, changes in the rate of capacity utilization are shown to have only modest effects on the steady state unemployment rate. The Okun coefficient is inversely related to the steady state unemployment rate, which accords with intuition. The statistically significant decline in the trend growth rate of non-farm GDP in the 1970s explains, in part, the apparent instability of the Okun's law relationship which is revealed in recent studies. These studies can be criticised for their conometric methodologies.     

Cyclical output,cyclical unemployment,and Okun's coefficient A structural time series approach

Okun's coefficient is estimated from U.S. quarterly data covering the period 1947:1–1992:2. The cyclical components of unemployment and output are extracted by smoothing using the Kalman filter as applied to Harvey's structural time series model. The estimated Okun's coefficient is around −0.38 irrespective of the whether the model used is static or dynamic and irrespective of the lag length in the dynamic model.     

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

During 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.     

Self-employment and the Okun's law

This research establishes a significant relationship between the share of self-employment in total employment and the Okun's coefficient, which had been insufficiently addressed in the literature. We provide evidence on the determinants driving the differences in the unemployment–output relationship in Spanish regions and conclude that the differences in the share of self-employment in total employment prove relevant when accounting for differences in Okun's law, and its effect is greater than that of labour productivity per worker, which had been considered the main factor for regional discrepancies. The economic policy implications of this outcome are valuable for two reasons: European authorities are promoting self-employment and the emergence of the ‘gig economy’. This finding also opens a notable line of research: assessing whether this empirical regularity is observable in other economies.     

Testing Okun’s law with Swiss industry data

Okun’s law postulates a stable relationship between quarterly output growth and changes in (un)employment. This proposition has so far been tested with macroeconomic data at the highest level of aggregation. The article goes beyond that in extending the analysis to industry data from Switzerland, applying a method suggested by the International Monetary Fund. Another focus is on whether expansions in production have become more ‘jobless’ over the most recent business cycle compared to earlier ones. This does not seem to be the case in Switzerland, except in the construction industry.     

A strong hysteretic model of Okun’s Law: theory and a preliminary investigation

This paper presents a ‘strong hysteretic’ version of Okun’s Law, that is, a version of the law in which ‘history matters.’ In this version of the link between fluctuations in unemployment and growth, the most important past growth shock exerts an influence on the current unemployment rate. A theoretical framework is proposed in order to lay the foundations of this version of Okun’s Law. In this framework, the hysteresis property arises because a large number of heterogeneous firms discontinuously adjust their activity levels in response to fluctuations in the rate of growth. The foundations having been laid, a method for empirically testing our hysteretic Okun’s Law is presented. An algorithm permits construction of a hysteresis operator, which synthesizes, for every moment, the growth shocks that have remained in the memory bank of the unemployment rate. Empirical tests are conducted to assess the empirical relevance of this version of Okun’s Law, as compared to the more familiar linear relationship. Empirical results consistent with hysteresis are found for several of the countries in our sample.     

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.     

Okun’s law revisited: a threshold in regression quantiles approach

This article proposes, for the first time, a threshold in regression quantiles approach to the analysis of Okun’s law. By applying to US data over the 1948Q1–2016Q4 period, we have three major findings. First, a single threshold is detected for both multiple and individual quantiles cases. However, the effect of threshold nonlinearity is only present in the middle to upper quantiles of the conditional unemployment distribution in the individual quantiles case. Second, the first-order autoregressive coefficients of unemployment are significantly larger in the lower-growth regime, indicating that shocks to unemployment appear to be more persistent during recessions. Finally, the Okun’s coefficients are all negative across the recessionary and expansionary regimes, confirming the validity of Okun’s law. Moreover, the Okun’s coefficients are smaller (more negative) in the lower-growth regime, suggesting that the effect of differenced output on differenced unemployment is asymmetric, and is more pronounced in recessions.     

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 Nonlinear Relationship: Unemployment and Economic Growth (Construction Sector) in Spain, 1995.1–2012.2

A quadratic version of the first-difference Okun’s Law model was estimated for Spain (1995.Q1-2012.Q2). An accelerationist version of Okun’s Law was obtained, which allowed us to calculate variable Okun coefficients as well as critical points in the relationship between construction sector growth and the variation in overall unemployment. The optimal economic growth rate was determined to be 7.38 %. By applying principal components, it is demonstrated that this sector led the economic process after 1995.     

GDP dynamics and unemployment changes in developed and developing countries

We design a new specification of Okun’s model that takes the following features into account: estimation of the relation in first differences, the possible lagged effect of GDP dynamics on unemployment changes, the persistence of unemployment rate dynamics, the possible different values of Okun coefficients under recession (with respect to periods of increases in GDP), the existence of cross-country institutional and structural differences (i.e. country-specific Okun coefficients), the additional effect on unemployment caused by large adverse shocks such as financial crises.

A distinctive feature of this article is its consideration of a large set of countries for which we find differentiated Okun coefficients. Moreover, we focus in particular on the distinction between developed and developing countries, and on the additional impact of financial crises. From an econometric point of view, the model developed belongs in the family of linear mixed-effects models. The estimation method uses an expectation-maximization (EM) algorithm. Our results confirm the general validity of ‘Okun’s law’; they show the Okun coefficient differences between high- and low-income countries; and they evidence an additional impact of some types of financial crisis on the unemployment dynamics of developed economies.     

The effects of inflation targeting on Okun’s law

This article provides the first empirical evidence that the adoption of inflation targeting (IT) matters for the extent of tradeoff between unemployment and output, that is Okun’s law. Our full sample results indicate that IT leads to a more negative Okun’s coefficient, suggesting that, for a given reduction of output, the introduction of IT is associated with a higher unemployment rate. Subsample analyses reveal that the whole sample results are mainly driven by the industrial subsample outcomes, not the developing counterparts. Our findings point out that IT not only influences macroeconomic variables per se but also affects the relationship between/among macroeconomic variables.