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On the Determinants of the Okun’s Law: New Evidence from Time-Varying Estimates

Author

Listed:
  • Davide Furceri

    (International Monetary Fund)

  • João Tovar Jalles

    (Portuguese Public Finance Council
    REM/UECE
    Nova School of Business and Economics)

  • Prakash Loungani

    (International Monetary Fund)

Abstract

This paper revisits, by means of both time series and panel data analyses, the empirical regularity identified by Okun’s (in: Proceedings of the business and economics statistics section, American Statistical Association, Washington, DC, 98–103, 1962) seminal paper. Based on a sample of 85 advanced and developing economies between 1978 and 2014, we confirm the existence of an average negative and statistically significant Okun’s relationship. At the same time, results suggest that the relation varies substantially across countries and times. Finally, we identify several factors affecting the variation in Okun’s coefficient across and within countries. Across countries, the relationship is stronger in countries with higher average unemployment, a larger share of public employment, lower informality and smaller agricultural sectors, and one that is more diversified. Within countries, in addition to some of these factors, we find that deregulation in labor and product markets and recessions have strengthened the response of unemployment to the business cycle.

Suggested Citation

  • Davide Furceri & João Tovar Jalles & Prakash Loungani, 2020. "On the Determinants of the Okun’s Law: New Evidence from Time-Varying Estimates," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(4), pages 661-700, December.
    • Handle: RePEc:pal:compes:v:62:y:2020:i:4:d:10.1057_s41294-019-00111-1
    DOI: 10.1057/s41294-019-00111-1
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    More about this item

    Keywords

    Okun’s law; Crises; Time-varying coefficients; Labor market regulations; Product market regulations; Urbanization; Public sector employment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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