Revisiting the Okun relationship

Our 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 Role of Education vis-a-vis Job Experience in Explaining the Transitions to Employment in the Spanish Youth Labour Market

It is well known that young cohorts experience higher unemployment rates than their adult counterparts. However, it is less well known that more educated young cohorts may face higher unemployment rates than less educated ones. This seems to be the evidence in some OECD countries such as Spain and Italy. We use data on the Spanish labour market and estimate a duration model for young unemployed people. University graduates’ lack of job experience may explain this puzzling observation.     

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.     

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.     

Asymmetry and the Problem of Aggregation in the Euro Area

This paper highlights the implications for a single monetary policy when key economic relationships are nonlinear or asymmetric at a disaggregate level. Using data for the EU and OECD countries we show that there are considerable non-linearities and asymmetries in the Phillips and Okun curves. High unemployment has relatively limited effect in pulling inflation down while low unemployment can be much more effective in driving it up. Downturns in the economy are both more rapid and sustained in driving unemployment up than recoveries are in bringing it down. There is considerable variety in these relationships and IS curves across not just countries but also sectors and regions.     

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.     

The pyramid of Okun’s coefficient for Italy

Our aim is to propose 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. 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.     

Measuring Labour Market Flexibility in the OECD Countries

This paper investigates the adjustment of employment to population shocks in 22 OECD countries over the period 1960–1997. Most of the countries have experienced significant population shocks during that period – due to migration and other reasons. We estimate the speed of adjustment parameter which is used as a measure of the functioning of the labour market. If the OECD countries are compared using this measure, it turns out that the Anglo Saxon countries clearly outperform the other (European) countries in terms of labour market adjustment. In the case of the Nordic countries, the results presented are the most extreme. In practically all OECD countries, the functioning of the labour market seems to have deteriorated over time. These observations seem to be helpful in explaining the behaviour of unemployment rates in the OECD area.     

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 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.     

Long-run homogeneity of labour demand. Panel evidence from OECD countries

This study makes an attempt to examine the long-run relationship between the key labour market parameters of employment, aggregate output, real product wages and labour-augmenting technical progress for a sample of 21?OECD countries covering the period from 1970 to 2000. A new panel error correction technique is applied, which allows one to constrain the long-run coefficients to be identical across the countries while letting the short-run coefficients which govern the dynamics and the error variances differ freely, respectively. Thus, this estimation approach assumes that institutional and cultural differences, albeit causing short-term deviations of labour demand behaviour across countries, leave the long-run structure of the labour markets unaffected. That is to say, the long-run equilibrium relationship between the key labour market variables is taken to be similar across the OECD economies. The empirical analysis shows that the long-run relationship between the key labour market parameters is equal across the OECD countries. However, adjustment speed of actual employment to the equilibrium is much higher in countries with flexible labour markets, such as the USA and UK, than in countries with rigid labour markets, such as Germany and Austria.     

The Feldstein–Horioka puzzle in groupings of OECD members: A panel approach

This paper investigates the relationship between investment and savings in 26 OECD countries and demonstrates that the relationship changes when the countries under consideration in the selected panel vary. Accordingly, panel estimations using annual data for the period from 1970 to 2008 have been made for various groupings of developed countries, specifically the OECD as a whole, the EU15, NAFTA and the G7. Additionally, the paper examines changes in investment savings relationships when the presence of structural shifts in developed countries – where such exist – are taken into account. Recently developed panel techniques are employed to examine the investment savings relationship and estimate saving-retention coefficients. The empirical findings reveal that the Feldstein–Horioka puzzle exists only in the panel of G7 countries, wherein the saving-retention coefficient is estimated as 0.754 and 0.864 (for the full sample of G7 countries and for stable G7 countries, respectively). The estimated saving-retention coefficient for unstable G7 countries is 0.482, which indicates a higher level of capital mobility in unstable countries with respect to stable ones. This conclusion is further supported by the estimations for OECD countries and the EU15.     

Unemployment and output dynamics in CIS countries: Okun’s law revisited

Okun’s law is a well-known relationship between the change in the unemployment rate and output growth. The main objective of this article is to provide a rigorous econometric analysis of Okun’s law for several CIS countries using different models and theoretically justified econometric methods. The traditional approach to Okun’s law estimation using OLS regressions does not account for possible endogeneity of regressors and the implied inconsistency of the estimates obtained. These problems point out to incorrectness of applications of the standard OLS estimation techniques. Our study addresses these issues by using econometrically justified instrumental variable regression methods. The article provides the results and discussions on practical use of Okun’s relationships for evaluation of average effects of economic growth on the unemployment rate, and vice versa; importance of accounting for confidence intervals in applications of Okun’s models to economic development analysis and cross-country comparisons and evaluation of effects of crises and other structural shocks on the economies considered. We also discuss in detail the results of formal econometric tests and economic motivation for validity of instrumental variables used in the study. The formal econometric tests, together with economic arguments, allow us to determine the most appropriate Okun-type models for each of the CIS countries under consideration.     

The Feldstein-Horioka puzzle in African countries: A panel cointegration analysis

This paper investigates the Feldstein-Horioka coefficients for 37 African countries using the recently developed Pooled Mean Group (PMG), Fully Modified OLS (FMOLS), and Dynamic OLS (DOLS) panel cointegration techniques. The empirical findings reported in this paper reveal that savings and investment are non-stationary and cointegrated series. The estimated coefficients using FMOLS, DOLS, and PMG are 0.38, 0.58, and 0.36, respectively, for the sample as a whole for the period from 1970 to 2006. These results confirm previous studies' findings that capital was relatively mobile in African countries compared to OECD countries. In addition, our study shows that there are marked differences in savings retention coefficients for different country groups in Africa (CFA franc zone and non-CFA franc zone countries, oil-producing and non-oil-producing countries, civil law and common law countries). These results have some policy implications.     

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.     

Demographic and Economic Pressure on Emigration out of Africa*

Two of the main forces driving European emigration in the late nineteenth century were real wage gaps between sending and receiving regions and demographic booms in the low‐wage sending regions. Our new estimates of net migration for the countries of sub‐Saharan Africa show that exactly the same forces driving African across‐border migration are at work today. The results suggest that rapid growth in the cohort of potential young emigrants, population pressure on the resource base, and slow economic growth are likely to intensify the pressure for migration out of Africa and into high‐wage OECD countries over the next two decades.     

Is health care really a luxury in OECD countries? Evidence from alternative price deflators

This article examines whether real Health-care Expenditure (HE) is a luxury or necessity for Organization for Economic Co-operation and Development (OECD) countries over the period 1972 to 2004 within a panel unit root and panel cointegration framework. To realize this objective, we regress HE on real Gross Domestic Product (GDP), the proportion of the population aged over 65 (P65) and a time trend (T). We first present results for 18 countries where real HE per capita is obtained using a general GDP deflator. For these countries, we find that health care is a luxury for just one country. Next, we present results for eight countries where real HE is obtained using a specific health-care price index. When the general GDP deflator is replaced with a specific health-care price index, at least one of the GDP, P65 or T coefficients for the eight countries changes in a reasonably dramatic fashion, suggesting that the use of the GDP deflator introduces bias into the regression. We find that HE is a necessity in all eight countries. Given that the reliability of the GDP deflator results is questionable, on the basis of the results for the eight countries, we conclude that HE is a necessity.     

THE KNOWLEDGE-CAPITAL MODEL OF FDI: A TIME VARYING COEFFICIENTS APPROACH

The present article reexamines some of the issues regarding the Knowledge-Capital Model that encompasses both horizontal and vertical Foreign Direct Investment. The empirical support for this model is however mixed. This article proposes a new way of estimating coefficients by allowing them to vary over time. The estimation results obtained using data from 30 OECD countries for the period from 1982 to 2003 confirm that these coefficients cannot be considered as constant over time and that the vertical component of the Knowledge-Capital Model is relevant.     

The consequences of labor market flexibility: Panel evidence based on survey data

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence.     

A cross-country analysis of consumption patterns

This paper uses the system-wide approach to analyse the consumption patterns in 18 OECD countries. The results show that, on average, the OECD per capita consumption increased by 3% per annum and prices increased by about 7% per annum; OECD consumers spend about half of their income on food, housing and transport. It is also shown that, in most OECD countries, food, housing and medical care are necessities and clothing, durables, transport and recreation are luxuries, and that the demand for all goods considered are price inelastic. The controversial hypothesis of Stigler and Becker (1977) that tastes are the same across countries is also tested and it is found that the OECD consumption data do not support their claim.