Asymmetry in Okun's law

Abstract.  In this paper we support the proposition that the output‐unemployment relationship as represented by Okun's law is asymmetric. Okun's coefficients are defined based on a dynamic model that allows for asymmetry in the relationship between cyclical output and unemployment. Using data from the United States for the post‐war period, our results show that the short‐run effects of positive cyclical output on cyclical unemployment are quantitatively different from those of negative ones, and the data are consistent with the proposition that cyclical unemployment is more sensitive to negative than to positive cyclical output. Several theoretical explanations of asymmetry rationalize the findings. JEL Classification: C13, C22, E32     

The Beveridge Curve and regional disparities in Canada

The Beveridge curve establishes an inverse relationship between the unemployment rate and the vacancy rate. It has been documented and discussed at length by Blanchard and Diamond (1989) for the United States. The unemployment–vacancy relationships of the Canadian economy and its regions are considered. This analysis reveals some important distinctions in the behaviour of the regional Baveridge curves and some interesting similarities. At the aggregate level, the observations are not strikingly different from those of Blanchard and Diamond for the US economy.     

Technology-driven forecasts, the Phillips curve, and monetary policy-making

The relationship between unemployment and the inflation rate is nonlinear and negative within the shorter-run timespan of business cycles, but positive in the longer run, the two-generation period in which techno-economic systems advance from innovation to market saturation. Monetary policymaking in the United States utilizes forecasts based upon the shorter term relationship, but these forecasts may be confounded by the countervailing long-wave relationship. This study presents a model that includes both the short- and long-term relationships and shows how inclusion of long-wave considerations changes preferred policy choices.     

UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.     

Unemployment persistence in OECD countries after the Great Recession

The 2008 economic downturn in the United States resulted in a wave of contractionary effects across many OECD countries. This paper investigates the pattern of the unemployment persistence in the United States and other 28 OECD countries before and after the Great Recession. To detect possible changes in the pattern of unemployment persistence, we employ a mean bias-corrected estimation of the persistence parameter with a rolling window of five years. In addition, we estimate the most likely date of change in the trend function of unemployment to test whether there was any significant change in the pattern of unemployment persistence after the Great Recession. We find significant evidence of a structural break and hysteresis in unemployment rates, with a persistence parameter close to unity, across the United States and other 28 OECD countries. Besides, bootstrap permutation tests show that all half-lives and impulse response functions have significantly changed after the Great Recession. Therefore, our findings call for structural reforms aimed at improving labor market performance, to prevent upward shifts in unemployment across OECD countries from becoming permanent.     

Shadow economy and unemployment rate in USA: is there a structural relationship? An empirical analysis

This article aims to estimate the size of the US shadow economy (SE) using a structural equation approach and to evaluate if a structural relationship exists between the SE and the unemployment rate (UR) in the United States. The size of the SE is estimated to be decreasing over the last two decades. We corroborate the existence of a structural relationship between the SE and the UR by using a simple theoretical model. Furthermore, we extend the Okun's law to estimate the structural relationship between growth rate of official GDP, SE and UR. Our results indicate a significant positive relationship between the SE and the UR.     

Unemployment Responses to 'Skill-biased' Technology Shocks: the Role of Labour Market Policy

Do skill-biased shocks that increase the spread of labour productivities, interacting with different policy regimes, explain the rise in unemployment in Europe relative to the United States in the 1980s and 1990s? The hypothesis is an implication of a version of the Mortensen and Pissarides (1994) model of equilibrium unemployment which allows for worker heterogeneity. A calibrated version of the model implies that a similar unemployment increase would have occurred in the United States over this period, given changes in relative productivity by education implied by observed wage changes, had unemployment compensation and employment protection policies been at European levels.     

Exploring the causes of the slowdown in remittances to Mexico

This article explores the slowdown of remittances to Mexico and the role that may have been played by some key variables from the United States economy. The findings show that several measures of United States economic activity and different proxies for the unemployment of Mexican nationals living in the United States do not appear to have a strong impact on remittance transfers. On the other hand, this study finds that United States housing variables do seem to affect remittance transfers. In particular, there is a special prominence of the impact shown by the number of housing starts in the United States. Overall, the results seem to suggest that there is not a single United States economic factor that is responsible for the decrease of remittances to Mexico but rather a combination of factors. Among these factors, the decrease in United States housing activity seems to play a major role.     

Flexibility and Growth

After two decades of theoretical discussion and application of labour policies aimed at flexibility, ever-spreading unemployment in Europe has compelled some official institutions to admit that the 'rigidity' of the labour market does not suffice to account for the different trends in employment displayed by Europe and the United States. In this paper, we focus on the role played by differentials in income growth. After briefly reviewing the explanations of European unemployment based on labour market rigidity and their respective weaknesses, we look at the relationship between growth and employment, concluding that there are grounds for maintaining that the causes of Europe's higher unemployment reside mainly in its lower rate of growth.We therefore investigate the reasons that may be responsible for a more stringent macroeconomic constraint on European growth.We conclude that if a lack of growth is at the root of European unemployment, then merely dismantling labour market institutions, and replacing them with a more flexible system of industrial relations, will not only fail to produce the expected results but may also have negative effects, in both the social and productive structure.     

WHY ARE FERTILITY RATES AND FEMALE EMPLOYMENT RATIOS POSITIVELY CORRELATED ACROSS O.E.C.D. COUNTRIES?*

We develop a quantitative theory of fertility and labor market participation decisions in order to investigate the role of labor market frictions in generating the observed positive association between fertility and employment among O.E.C.D. countries. We find that unemployment induces females to postpone and space births, which, in turn, reduces the total fertility rate. Moreover, differences in female labor outcomes across the United States and Spain can account for the low fertility rate in Spain relative to the United States. We also find that labor market frictions can generate a positive association between female employment ratios and fertility rates across economies.     

A fractionally cointegrated VAR analysis of economic voting and political support

We use a fractionally cointegrated vector autoregressive model to examine the relationship between Canadian political support and macroeconomic conditions. This model is well suited for the analysis because it allows multiple fractional time series and admits simple asymptotic inference for the model parameters and tests of the hypotheses of interest. In the long‐run equilibrium, we find that support for the Progressive Conservative Party was higher during periods of high interest rates and low unemployment, while support for the Liberal Party was higher during periods of low interest rates and high unemployment. We also test and reject the notion that party support is driven only by relative (to the United States) economic performance. Indeed, our findings suggest that US macroeconomic variables do not enter the long‐run equilibrium of Canadian economic voting (political opinion poll support) at all.     

Minimum wages and youth unemployment

This paper constructs a labor search model to explore the effects of minimum wages on youth unemployment. To capture the gradual decline in unemployment for young workers as they age, the standard search model is extended so that workers gain experience when employed. Experienced workers have higher average productivity and lower job finding and separation rates that match wage and worker flow data. In this environment, minimum wages can have large effects on unemployment because they interact with a worker's ability to gain job experience. The increase in minimum wages between 2007 and 2009 can account for a 0.8 percentage point increase in the steady state unemployment rate and a 2.8 percentage point increase in unemployment for 15–24 year old workers in the model parameterized to simulate outcomes of high school educated workers. Minimum wages can also help explain the high rates of youth unemployment in France compared to the United States.     

Exact Unemployment Rate Indices

Conventional unemployment rate measures tend to overestimate the degree of labor underutilization if unemployment disproportionately affects less educated and generally less productive workers. Based on index number theory as well as on econometric techniques, this article proposes a number of alternative measures that are exact for specific labor aggregator functions. The results for the United States show that the conventional, unweighted unemployment rate overestimates the true rate by about 0.6 of a percentage point, or by almost 14%.     

The relationship between production and unemployment in Japan: Okun's law in comparative perspective

This paper studies the question whether the celebrated ‘Okun's law’, a relation between excess capacity and unemployment, applies to the postwar Japanese economy. Though the fitness of estimation is weak, the coefficient that measures the responsiveness of the output gap to the unemployment rate is very large, reaching 28. This large coefficient can be attributed to the elastic response in the female participation ratio, to flexible working hours, to the slow adjustment in employment, and to changes in industrial structures. The results are compared with those in the United States.     

LIFE‐CYCLE LABOR SEARCH WITH STOCHASTIC MATCH QUALITY

In the United States, unemployment, job finding, and separation rates decline as worker age increases. To explain these facts, we build a search and matching model of the labor market that incorporates a life‐cycle structure and features random match quality as well as human capital accumulation. The calibrated model successfully reproduces the empirical patterns of unemployment and job transition rates over the life cycle and generates plausible wage implications. We then explore the efficiency implications of the model and find that the differences between the market and planner allocations are more important for older workers.     

Estimation of income elasticities from cross-section data

Using Johnson's decomposition technique, this paper demonstrates that the disappearance of the gap between female and male unemployment rates in the United States during the last decade results partly from a general hiring policy that is favourable to women workers. This conclusion holds for workers in five out of eight occupational subsamples considered. The sign and size of unexplained female - male unemployment rate differential estimated from 1969, 1977 and 1987 CPS data suggest that hiring discrimination against females in the US labour market has declined considerably during the last two decades. The study also supports the earlier finding that the growth of employment in government and in the female dominated service sector, and migration of workers from the South to other regions contribute significantly to the convergence of male and female unemployment rates in the 1980s.     

Quarterly US unemployment: Cycles,seasons and asymmetries

This paper documents three stylized facts for the quarterly unemployment rate in the United States. Firstly, unemployment is asymmetric over the business cycle, i.e. it rises sharply in recessions and it falls slowly in expansions. Secondly, its seasonal fluctuations are not constant across the two business cycle stages in the sense that there is less seasonality in recession periods. Thirdly, the effect of shocks to the unemployment rate in expansions seem transitory, while this effect is permanent in recessions. Some implications of these stylized facts for empirical macroeconomics and seasonal adjustment are discussed.     

Transatlantic Differences in Labour Markets: Changes in Wage and Non-Employment Structures in the 1980s and the 1990s

Abstract. Rising wage inequality in the United States and Britain and rising continental European unemployment have led to a popular view in the economics profession that these two phenomena are related to negative relative demand shocks against the unskilled, combined with flexible wages in the Anglo-Saxon countries, but wage rigidities in continental Europe ('Krugman hypothesis'). This paper tests this hypothesis based on seven large person-level data sets for the 1980s and the 1990s. I use a more sophisticated categorization of low-skilled workers than previous studies, which exhibits differences between German workers with and without apprenticeship training, particularly in the 1980s. I find evidence for the Krugman hypothesis when Germany is compared with the United States. However, supply changes differ considerably between countries, with Britain experiencing enormous increases in skill supply explaining the relatively constant British skill premium in the 1990s.     

The effect of unemployment on labour productivity: an international comparative analysis

This is a comparative empirical analysis of the effect of unemployment - via a ‘work-intensity effect’ and/or a ‘workplace-innovation effect’ - on manufacturing productivity growth in eight advanced capitalist economies. My econometric results confirm earlier findings of positive work-intensity and workplace-innovation effects of unemployment on productivity growth in the United States; but I do not obtain similarly strong results for the other countries, and in Germany and Sweden I find evidence of negative unemployment effects. My findings are consistent with the comparative hypothesis that the sign and strength of unemployment effects on productivity growth will vary negatively with the degree to which a country's socioeconomic environment is characterized by cooperative capital-labour relations and worker security.     

Wage rigidity and destabilizing spirals

This paper investigates the impact of real wage rigidity on the (de)stabilizing role of demand feedback. I show that destabilizing supply–demand feedback driven by countercyclical precautionary savings demand against uninsured unemployment risk is fundamentally a matter of rigid real wage adjustments over business cycles. Given the estimated wage rigidity consistent with aggregate labor market dynamics in the United States, the quantitative results suggest that the unemployment risk channel has a minor impact on aggregate volatility.