Changes in production, employment and unemployment are closely related over the course of the business cycle. However, as exemplified by the laws of Verdoorn (1949, 1993) and Okun (1962, 1970), thresholds seem to be present in the relationship. Due to capacity reserves of the firms, output growth must exceed certain levels for the creation of new jobs or a fall in the unemployment rate. In order to get efficient estimates of these bounds, we take a wide range of information into account. In particular, thresholds for employment and unemployment are determined on the grounds of 180 German regional labour markets. To capture cross section dependencies, a spatial SUR model is built up utilizing the eigenfunction decomposition approach suggested by Griffith (1996, 2000). The results indicate, that minimum output growth sufficient for a rise in employment is below the level which is needed for a simultaneous drop in the unemployment rate. Especially, the thresholds turn out to be about 1.2 and 2.2 percent, respectively. The ordering is related both to demographic changes and institutional settings on the labour market, such as the working of the unemployment benefit system. If spatial effects are not controlled for, the thresholds seem to be overrated.
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Paper provided by University of Kassel, Institute of Economics in its series Discussion Papers in Economics with number
52/04.
Length: 17 pages Date of creation: Jan 2004 Date of revision: Publication status: Published in Papers in Regional Science, Vol. 85 (2006), S. 523-542. Handle: RePEc:kas:wpaper:2004-52
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