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Post-recession US employment through the lens of a non-linear Okun’s law

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  • Menzie Chinn
  • Laurent Ferrara
  • Valérie Mignon

Abstract

This paper aims at investigating the relationship between employment and GDP in the United States. We disentangle trend and cyclical employment components by estimating a non-linear Okun’s law based on a smooth transition error-correction model that simultaneously accounts for long-term relationships between growth and employment and short-run instability over the business cycle. Our findings based on out-of-sample conditional forecasts show that, since the exit of the 2008-09 recession, US employment is on average around 1% below the level implied by the long run output-employment relationship, meaning that about 1.2 million of the trend employment loss cannot be attributed to the identified cyclical factors.

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File URL: http://economix.fr/pdf/dt/2013/WP_EcoX_2013-12.pdf
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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2013-12.

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Length: 19 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:drm:wpaper:2013-12

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Keywords: Okun’s law; trend employment; non-linear modeling;

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  1. Rothstein, Jesse, 2012. "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations," Institute for Research on Labor and Employment, Working Paper Series qt2x576316, Institute of Industrial Relations, UC Berkeley.
  2. Laurence M. Ball & Daniel Leigh & Prakash Loungani, 2013. "Okun's Law: Fit at Fifty?," NBER Working Papers 18668, National Bureau of Economic Research, Inc.
  3. Chen, Jinzhu & Kannan, Prakash & Loungani, Prakash & Trehan, Bharat, 2012. "New evidence on cyclical and structural sources of unemployment," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-23.
  4. Laure Turner & Hervé Boulhol, 2008. "Recent Trends and Structural Breaks in US and EU15 Labour Productivity Growth," OECD Economics Department Working Papers 628, OECD Publishing.
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  6. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  7. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  8. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 320-332, April.
  9. Benati, Luca, 2007. "Drift and breaks in labor productivity," Working Paper Series 0718, European Central Bank.
  10. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
  11. Brian Silverstone & Richard Harris, 2001. "Testing for asymmetry in Okun's law: A cross-country comparison," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-13.
  12. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 320-332.
  13. Marcello M. Estevão & Evridiki Tsounta, 2011. "Has the Great Recession Raised U.S. Structural Unemployment?," IMF Working Papers 11/105, International Monetary Fund.
  14. Viren, Matti, 2001. "The Okun curve is non-linear," Economics Letters, Elsevier, vol. 70(2), pages 253-257, February.
  15. 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.
  16. Owyang, Michael T. & Sekhposyan, Tatevik, 2012. "Okun’s law over the business cycle: was the great recession all that different?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 399-418.
  17. Bec Frederique & Othman Bouabdallah & Laurent Ferrara, 2011. "The possible shapes of recoveries in Markov-Switching models," THEMA Working Papers 2011-02, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  18. Edward P. Lazear & James R. Spletzer, 2012. "The United States Labor Market: Status Quo or A New Normal?," NBER Working Papers 18386, National Bureau of Economic Research, Inc.
  19. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
  20. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
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Cited by:
  1. Jon D. Wisman & Aaron Pacitti, 2013. "Ending the Crisis With Guaranteed Employment and Retraining," Working Papers 2013-12, American University, Department of Economics.
  2. Ryan Herzog, 2013. "Using state level employment thresholds to explain Okun’s Law," IZA Journal of Labor Policy, Springer, vol. 2(1), pages 1-26, December.

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