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A New Framework for Output-Unemployment Relationship: Okun’s Law Revisited

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  • Ismihan, Mustafa
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    Abstract

    This paper provides a new and useful framework for developing various models to investigate the output-unemployment relationship. By using this framework, a simple but reasonable theoretical background to Okun’s law is derived. This theoretical background, in turn, facilitates the decomposition of Okun’s law coefficient into several quantifiable and interpretable components that incorporate main insights from Arthur Okun’s original analysis. The empirical decomposition exercise indicates that Okun’s law has an inherent tendency to vary substantially over time, especially, in response to the structural changes in legal, institutional and other related characteristics of labor and goods markets.

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    File URL: http://mpra.ub.uni-muenchen.de/28135/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28135.

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    Date of creation: Dec 2010
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    Handle: RePEc:pra:mprapa:28135

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    Keywords: output-unemployment relationship; Okun’s law;

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    1. Robert J. Gordon, 1973. "The Welfare Cost of Higher Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 133-206.
    2. Mairesse, Jacques, 1984. "'The relationship between production and unemployment in Japan Okun's Law in comparative perspective' by K. Hamada and Y. Kurosaka," European Economic Review, Elsevier, vol. 25(1), pages 99-105, June.
    3. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
    4. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
    5. Di Tella, Rafael & MacCulloch, Robert, 2005. "The consequences of labor market flexibility: Panel evidence based on survey data," European Economic Review, Elsevier, vol. 49(5), pages 1225-1259, July.
    6. Adriana Kugler, 2004. "The Effect of Job Security Regulations on Labor Market Flexibility: Evidence from the Colombian Labor Market Reform," NBER Working Papers 10215, National Bureau of Economic Research, Inc.
    7. Edward S. Knotek II & Stephen Terry, 2009. "How will unemployment fare following the recession?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-33.
    8. Thor Hultgren, 1960. "Changes in Labor Cost During Cycles in Production and Business," NBER Books, National Bureau of Economic Research, Inc, number hult60-1, octubre-d.
    9. Weber, Christian E, 1995. "Cyclical Output, Cyclical Unemployment, and Okun's Coefficient: A New Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 433-45, Oct.-Dec..
    10. Blinder, Alan S, 1997. "Is There a Core of Practical Macroeconomics That We Should All Believe?," American Economic Review, American Economic Association, vol. 87(2), pages 240-43, May.
    11. Kaufman, Roger T., 1988. "An international comparison of Okun's laws," Journal of Comparative Economics, Elsevier, vol. 12(2), pages 182-203, June.
    12. 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.
    13. Fay, Jon A & Medoff, James L, 1985. "Labor and Output over the Business Cycle: Some Direct Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 638-55, September.
    14. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    15. Paramsothy Silvapulle & Imad Moosa & Mervyn Silvapulle, 2004. "Asymmetry in Okun's law," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 353-374, May.
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