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The relationship between output and unemployment in Scotland: A regional analysis

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  • Revoredo-Giha, Cesar
  • Leat, Philip M.K.
  • Renwick, Alan W.

Abstract

The relationship between unemployment and growth (i.e., the so-called Okun’s Law) has long standing in macroeconomics and regional economics. In this paper we estimate such a relationship for Scotland and at the Nomenclature of Territorial Units for Statistics (NUTS) level 3 regions using a panel dataset. The main motivations behind this interest are twofold: first, to test whether such a relationship exists in Scotland and how different these estimates are from those produced for the UK. Second, whether there exist regional differences in the estimates. The latter is particularly important in the context of the current budgetary cuts, which may affect both GDP growth and unemployment in different ways rural and urban areas. Results indicate that the Okun’s coefficient for Scotland is slightly higher than the one computed for the UK (1.7 Scotland versus 1.39 and 1.45 for the UK), and although an Okun relationship seemed to be valid for most of the regions, there were no statistical differences between rural and urban areas. However, as regards the effect of economic growth on unemployment, the results indicate a different and stronger effect in urban areas than in rural areas.

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Bibliographic Info

Paper provided by Scottish Agricultural College, Land Economy Research Group in its series Working Papers with number 131465.

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Date of creation: 2012
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Handle: RePEc:ags:saclwp:131465

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Keywords: Unemployment; Scotland; growth; panel data; cointegration; Labor and Human Capital; Public Economics;

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  1. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
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  4. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
  5. Prachowny, Martin F J, 1993. "Okun's Law: Theoretical Foundations and Revised Estimates," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 331-36, May.
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  8. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  9. Peter Pedroni, 2004. "Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis," Department of Economics Working Papers 2004-15, Department of Economics, Williams College.
  10. Villaverde, José & Maza, Adolfo, 2009. "The robustness of Okun's law in Spain, 1980-2004: Regional evidence," Journal of Policy Modeling, Elsevier, vol. 31(2), pages 289-297.
  11. John Connaughton & Ronald Madsen, 2009. "Regional implications of the 2001 recession," The Annals of Regional Science, Springer, vol. 43(2), pages 491-507, June.
  12. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  13. Blackley, Paul R., 1991. "The measurement and determination of Okun's Law: Evidence from state economies," Journal of Macroeconomics, Elsevier, vol. 13(4), pages 641-656.
  14. O'Donnell, A T & Swales, J K, 1979. "Factor Substitution, the C.E.S. Production Function and U.K. Regional Economics," Oxford Economic Papers, Oxford University Press, vol. 31(3), pages 460-76, November.
  15. Nicholas Apergis & Anthony Rezitis, 2003. "An examination of Okun's law: evidence from regional areas in Greece," Applied Economics, Taylor & Francis Journals, vol. 35(10), pages 1147-1151.
  16. Edward S. Knotek & II, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-103.
  17. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
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