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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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References

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  1. 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.
  2. Jesse Rothstein, 2012. "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations," NBER Working Papers 17966, National Bureau of Economic Research, Inc.
  3. Marcello M. Estevão & Evridiki Tsounta, 2011. "Has the Great Recession Raised U.S. Structural Unemployment?," IMF Working Papers 11/105, International Monetary Fund.
  4. Bec, F. & Bouabdallah, O. & Ferrara, L., 2011. "The possible shapes of recoveries in Markov-switching models," Working papers, Banque de France 321, Banque de France.
  5. 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.
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  7. 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, Federal Reserve Bank of San Francisco, issue March, pages 1-23.
  8. Benati, Luca, 2007. "Drift and breaks in labor productivity," Working Paper Series, European Central Bank 0718, European Central Bank.
  9. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 22(2), pages 331-356, April.
  10. 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, Federal Reserve Bank of St. Louis, issue Sep, pages 399-418.
  11. Viren, Matti, 2001. "The Okun curve is non-linear," Economics Letters, Elsevier, Elsevier, vol. 70(2), pages 253-257, February.
  12. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  13. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, Elsevier, vol. 27(2), pages 320-332.
  14. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
  15. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  16. 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.
  17. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, Elsevier, vol. 27(2), pages 320-332, April.
  18. Edward P. Lazear & James R. Spletzer, 2012. "The United States Labor Market: Status Quo or A New Normal?," Working Papers 12-28, Center for Economic Studies, U.S. Census Bureau.
  19. Laurence M. Ball & Daniel Leigh & Prakash Loungani, 2013. "Okun's Law: Fit at Fifty?," NBER Working Papers 18668, National Bureau of Economic Research, Inc.
  20. 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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Cited by:
  1. Ryan Herzog, 2013. "Using state level employment thresholds to explain Okun’s Law," IZA Journal of Labor Policy, Springer, Springer, vol. 2(1), pages 1-26, December.
  2. Jon D. Wisman & Aaron Pacitti, 2013. "Ending the Crisis With Guaranteed Employment and Retraining," Working Papers, American University, Department of Economics 2013-12, American University, Department of Economics.

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