IDEAS home Printed from https://ideas.repec.org/a/fip/fedker/y2007iqivp73-103nv.92no.4.html
   My bibliography  Save this article

How useful is Okun's law?

Author

Listed:
  • Edward S. Knotek

Abstract

From the beginning of 2003 through the first quarter of 2006, real gross domestic product in the United States grew at an average annual rate of 3.4 percent. As expected, unemployment during the period fell. Over the course of the next year, average growth slowed to less than half its earlier rate--but unemployment continued to drift downward. This situation presented a puzzle for policymakers and economists, who expected the unemployment rate to increase as the economy slowed. ; Typically, growth slowdowns coincide with rising unemployment. This negative correlation between GDP growth and unemployment has been named ?Okun?s law.? Part of the enduring appeal of Okun?s law is its simplicity, since it involves two important macroeconomic variables. Additionally, the relationship appears to enjoy empirical support. In reality, though, Okun?s law is a statistical relationship rather than a structural feature of the economy. As with any statistical relationship, it may be subject to revisions in an ever-changing macro economy. ; Knotek considers the usefulness of Okun?s law for policymakers and economists. The evidence suggests that Okun?s relationship between changes in the unemployment rate and output growth has varied considerably over time and over the business cycle. Nevertheless, Okun?s relationship can still be useful as a forecasting tool--provided that one takes its instability into account.

Suggested Citation

  • Edward S. Knotek, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, vol. 92(Q IV), pages 73-103.
  • Handle: RePEc:fip:fedker:y:2007:i:qiv:p:73-103:n:v.92no.4
    as

    Download full text from publisher

    File URL: http://www.kansascityfed.org/Publicat/ECONREV/PDF/4q07Knotek.pdf
    File Function: Full text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Glenn D. Rudebusch, 2000. "How fast can the new economy grow?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb25.
    2. Grant, Alan P., 2002. "Time-varying estimates of the natural rate of unemployment: a revisitation of Okun's law," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 95-113.
    3. 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 331-336, May.
    4. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    5. Moosa, Imad A., 1997. "A Cross-Country Comparison of Okun's Coefficient," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 335-356, June.
    6. Blanchard, Olivier & Galί, Jordi, 2006. "A New Keynesian Model with Unemployment," Kiel Working Papers 1335, Kiel Institute for the World Economy (IfW).
    7. David E. Altig & Terry J. Fitzgerald & Peter Rupert, 1997. "Okun's law revisited: should we worry about low unemployment?," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
    8. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
    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 433-445, Oct.-Dec..
    10. Clifford L. F. Attfield & Brian Silverstone, 1997. "Okun's Coefficient: A Comment," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 326-329, May.
    11. Todd E. Clark & Michael W. McCracken, 2007. "Forecasting with small macroeconomic VARs in the presence of instabilities," Finance and Economics Discussion Series 2007-41, Board of Governors of the Federal Reserve System (U.S.).
    12. Jesús Crespo Cuaresma, 2003. "Okun's Law Revisited," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 439-451, September.
    13. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    14. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, vol. 90(Q III), pages 5-32.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mohamad A. Abou Hamia, 2016. "Jobless growth: empirical evidences from the Middle East and North Africa region [Wachstum ohne Beschäftigung – empirische Evidenz aus Nahost und Nordafrika]," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 49(3), pages 239-251, November.
    2. Celia Melguizo, 2017. "An analysis of Okun’s law for the Spanish provinces," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 37(1), pages 59-90, February.
    3. Durech, Richard & Minea, Alexandru & Mustea, Lavinia & Slusna, Lubica, 2014. "Regional evidence on Okun's Law in Czech Republic and Slovakia," Economic Modelling, Elsevier, vol. 42(C), pages 57-65.
    4. Huang, Ho-Chuan (River) & Lin, Shu-Chin, 2008. "Smooth-time-varying Okun's coefficients," Economic Modelling, Elsevier, vol. 25(2), pages 363-375, March.
    5. Giorgio Canarella & Stephen M. Miller, 2017. "Did Okun’s law die after the Great Recession?," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 52(4), pages 216-226, October.
    6. PERUGINI, Cristiano, 2009. "Employment Intensity Of Growth In Italy. A Note Using Regional Data," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 9(1).
    7. Guisinger, Amy Y. & Hernandez-Murillo, Ruben & Owyang, Michael T. & Sinclair, Tara M., 2018. "A state-level analysis of Okun's law," Regional Science and Urban Economics, Elsevier, vol. 68(C), pages 239-248.
    8. Grant, Angelia L., 2018. "The Great Recession and Okun's law," Economic Modelling, Elsevier, vol. 69(C), pages 291-300.
    9. Antal, Miklós, 2014. "Green goals and full employment: Are they compatible?," Ecological Economics, Elsevier, vol. 107(C), pages 276-286.
    10. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
    11. Abdessalem GOUIDER & Ridha NOUIRA & Faouzi SBOUI, 2018. "La relation croissance-chômage en Tunisie : validation de la spécification non linéaire de la loi d’Okun," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 47, pages 27-41.
    12. Ian H.K. Leow, 2004. "A Simple Dynamic Model of Big-push," Econometric Society 2004 Australasian Meetings 218, Econometric Society.
    13. Ho-Chuan (River) Huang & Chih-Chuan Yeh, 2013. "Okun's law in panels of countries and states," Applied Economics, Taylor & Francis Journals, vol. 45(2), pages 191-199, January.
    14. Giovanni BUSETTA & Dario CORSO, 2008. "La legge di Okun: asimmetrie e differenziali territoriali in Italia," Working Papers 320, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    15. Raymond Hawkins, 2015. "Okun’s law and anelastic relaxation in economics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(1), pages 151-161, April.
    16. Roger, Perman & Jean-Philippe, Boussemart & Walter, Briec & Christophe, Tavéra, 2013. "How do technical change and technological distance influence the size of the Okun’s Law coefficient?," SIRE Discussion Papers 2013-60, Scottish Institute for Research in Economics (SIRE).
    17. Casto Montero Kuscevic, 2014. "Okun’s law and urban spillovers in US unemployment," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 53(3), pages 719-730, November.
    18. João Sousa Andrade, 2009. "The PIGS, does the Group Exist? An empirical macroeconomic analysis based on the Okun Law," GEMF Working Papers 2009-11, GEMF, Faculty of Economics, University of Coimbra.
    19. Costas KARFAKIS & Constantinos KATRAKILIDIS & Eftychia TSANANA, 2014. "Does output predict unemployment? A look at Okun's law in Greece," International Labour Review, International Labour Organization, vol. 153(3), pages 421-433, September.
    20. Mirko Abbritti & Andrea Boitani & Mirella Damiani, 2012. "Labour Market Imperfections, "Divine Coincidence" and Volatility of Employment and Inflation," Review of Economics and Institutions, Università di Perugia, vol. 3(1).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2007:i:qiv:p:73-103:n:v.92no.4. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/frbkcus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.