IDEAS home Printed from https://ideas.repec.org/a/spr/eurase/v13y2023i3d10.1007_s40822-023-00235-x.html
   My bibliography  Save this article

The role of labor market regulations on the sensitivity of unemployment to economic growth

Author

Listed:
  • Mindaugas Butkus

    (Institute of Regional Development)

  • Laura Dargenyte-Kacileviciene

    (Institute of Regional Development)

  • Kristina Matuzeviciute

    (Institute of Regional Development)

  • Dovile Rupliene

    (Institute of Regional Development)

  • Janina Seputiene

    (Institute of Regional Development)

Abstract

Okun’s law suggests that economic growth and unemployment are negatively correlated–i.e., a 1% increase in GNP is associated with a decrease in the unemployment rate of 0.3 percentage points. However, agreement on the magnitude of this effect, the so-called Okun’s coefficient, is far from consistent. Empirical findings suggest that Okun’s coefficient varies for males and females, across educational attainment levels, between countries with different labor market regulations, and over recession and expansion periods. This paper is among the first attempts to jointly consider the abovementioned aspects of the heterogeneity of Okun’s law. Our empirical examinations are based on data from European Union countries over the 2000–2020 period. With quarterly data, we apply time-series regressions and estimate gender-, age- and educational attainment level-specific Okun’s coefficients for each country. In the second step, we run cross-country regressions to establish whether labor market regulations influence the responsiveness of unemployment to output growth. We use panel specifications and time-varying Okun’s coefficients to check robustness. Our results show that straightening labor market regulation would not significantly reduce the possibilities for growth to reduce unemployment.

Suggested Citation

  • Mindaugas Butkus & Laura Dargenyte-Kacileviciene & Kristina Matuzeviciute & Dovile Rupliene & Janina Seputiene, 2023. "The role of labor market regulations on the sensitivity of unemployment to economic growth," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(3), pages 373-427, December.
  • Handle: RePEc:spr:eurase:v:13:y:2023:i:3:d:10.1007_s40822-023-00235-x
    DOI: 10.1007/s40822-023-00235-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40822-023-00235-x
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s40822-023-00235-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sandrine Cazes & Sher Verick & Fares Al Hussami, 2013. "Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun’s Law," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-18, December.
    2. van Ours, J.C., 2015. "The Great Recession was not so Great," Other publications TiSEM b88a88a8-c20f-4145-84c2-f, Tilburg University, School of Economics and Management.
    3. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    4. Prabirjit Sarkar, 2013. "Does an employment protection law lead to unemployment? A panel data analysis of OECD countries, 1990–2008," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(6), pages 1335-1348.
    5. Robert Dixon & G. C. Lim & Jan C. van Ours, 2017. "Revisiting the Okun relationship," Applied Economics, Taylor & Francis Journals, vol. 49(28), pages 2749-2765, June.
    6. Afşin Şahin & Aysit Tansel & M. Hakan Berument, 2015. "Output–Employment Relationship Across Sectors: A Long- Versus Short-Run Perspective," Bulletin of Economic Research, Wiley Blackwell, vol. 67(3), pages 265-288, July.
    7. Marcel Novák & Ľubomír Darmo, 2019. "Okun´s Law over the Business Cycle: Does it Change in the EU Countries after the Financial Crisis?," Prague Economic Papers, Prague University of Economics and Business, vol. 2019(2), pages 235-254.
    8. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    9. Andrew Evans, 2018. "Okun coefficients and participation coefficients by age and gender," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 7(1), pages 1-22, December.
    10. Jong-seok Oh, 2018. "Changes in cyclical patterns of the USA labor market: from the perspective of nonlinear Okun’s law," International Review of Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 237-258, March.
    11. Michael T. Owyang & Tatevik Sekhposyan, 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.
    12. Helmut Herwartz & Annekatrin Niebuhr, 2011. "Growth, unemployment and labour market institutions: evidence from a cross-section of EU regions," Applied Economics, Taylor & Francis Journals, vol. 43(30), pages 4663-4676.
    13. van Ours, Jan C., 2015. "The Great Recession was not so Great," CEPR Discussion Papers 10376, C.E.P.R. Discussion Papers.
    14. Mr. Marcello M. Estevão & Ms. Evridiki Tsounta, 2011. "Has the Great Recession Raised U.S. Structural Unemployment?," IMF Working Papers 2011/105, International Monetary Fund.
    15. Piton Céline & Rycx François, 2019. "Unemployment Impact of Product and Labor Market Regulation: Evidence from European Countries," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 9(1), pages 1-32, June.
    16. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    17. Mindaugas Butkus & Janina Seputiene, 2019. "The Output Gap and Youth Unemployment: An Analysis Based on Okun’s Law," Economies, MDPI, vol. 7(4), pages 1-17, November.
    18. Mr. Romain A Duval & Mr. Prakash Loungani, 2019. "Designing Labor Market Institutions in Emerging and Developing Economies: Evidence and Policy Options," IMF Staff Discussion Notes 2019/004, International Monetary Fund.
    19. Mr. Antonio David & Frederic Lambert & Mr. Frederik G Toscani, 2019. "More Work to Do? Taking Stock of Latin American Labor Markets," IMF Working Papers 2019/055, International Monetary Fund.
    20. Barbara Sawtelle, 2007. "Analyzing the Link Between Real GDP and Employment: An Industry Sector Approach," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 42(4), pages 46-54, October.
    21. Stephanie R. Aaronson & Mary C. Daly & William L. Wascher & David W. Wilcox, 2019. "Okun Revisited: Who Benefits Most from a Strong Economy?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 333-404.
    22. Maurizio BAUSSOLA & Chiara MUSSIDA & Jamie JENKINS & Matthew PENFOLD, 2015. "Determinants of the gender unemployment gap in Italy and the United Kingdom: A comparative investigation," International Labour Review, International Labour Organization, vol. 154(4), pages 537-562, December.
    23. Romain A Duval & Prakash Loungani, 2019. "Designing Labor Market Institutions in Emerging and Developing Economies; Evidence and Policy Options," IMF Staff Discussion Notes SDN/19/04, International Monetary Fund.
    24. Mindaugas Butkus & Kristina Matuzeviciute & Dovile Rupliene & Janina Seputiene, 2020. "Does Unemployment Responsiveness to Output Change Depend on Age, Gender, Education, and the Phase of the Business Cycle?," Economies, MDPI, vol. 8(4), pages 1-29, November.
    25. van Ours, Jan C., 2015. "The Great Recession was not so great," Labour Economics, Elsevier, vol. 34(C), pages 1-12.
    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. Robert Dixon & G. C. Lim & Jan C. van Ours, 2017. "Revisiting the Okun relationship," Applied Economics, Taylor & Francis Journals, vol. 49(28), pages 2749-2765, June.
    2. Mindaugas Butkus & Kristina Matuzeviciute & Dovile Rupliene & Janina Seputiene, 2020. "Does Unemployment Responsiveness to Output Change Depend on Age, Gender, Education, and the Phase of the Business Cycle?," Economies, MDPI, vol. 8(4), pages 1-29, November.
    3. Bod’a, Martin & Považanová, Mariana, 2021. "Output-unemployment asymmetry in Okun coefficients for OECD countries," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 307-323.
    4. Gina Cristina Dimian & Liviu Stelian Begu & Josef Jablonsky, 2017. "Unemployment and labour market mismatch in the European Union Countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(1), pages 13-44.
    5. Bas Weel, 2015. "Unemployment: The Great Recession and Beyond," De Economist, Springer, vol. 163(4), pages 405-413, December.
    6. Ekaterini Panopoulou, 2005. "A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators," Money Macro and Finance (MMF) Research Group Conference 2005 18, Money Macro and Finance Research Group.
    7. Thomas Obst, 2022. "Dynamic version of Okun’s law in the EU15 countries—The role of delays in the unemployment‐output nexus," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(2), pages 225-241, May.
    8. Créchet, Jonathan & Cui, Jing & Sabada, Barbara & Sawyer, Antoine, 2024. "Why Don't Firms Hire Young Workers During Recessions? A Replication of Forsythe (The Economic Journal, 2022)," I4R Discussion Paper Series 163, The Institute for Replication (I4R).
    9. 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.
    10. Mindaugas Butkus & Laura Dargenyte-Kacilevièiene & Kristina Matuzevièiute & Janina Šeputiene & Dovile Rupliene, 2023. "Age- and Gender-specific Output-employment Relationship across Economic Sectors," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 71(1), pages 3-22, January.
    11. Floro Ernesto Caroleo & Elvira Ciociano & Sergio Destefanis, 2017. "The role of the education systems and the labour market institutions in enhancing youth employment: a cross-country analysis," Discussion Papers 1_2017, CRISEI, University of Naples "Parthenope", Italy.
    12. Chien-Chiang Lee & Chun-Ping Chang, 2006. "The Long-Run Relationship Between Defence Expenditures And Gdp In Taiwan," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(4), pages 361-385.
    13. Sulistiyo K. Ardiyono & Arianto A. Patunru, 2022. "The impact of employment protection on FDI at different stages of economic development," The World Economy, Wiley Blackwell, vol. 45(12), pages 3679-3714, December.
    14. Iva TOMIĆ, 2018. "What drives youth unemployment in Europe? Economic vs non‐economic determinants," International Labour Review, International Labour Organization, vol. 157(3), pages 379-408, September.
    15. Berger, Johannes & Strohner, Ludwig, 2022. "Can labour mobility reduce imbalances in the euro area?," Research Papers 20, EcoAustria – Institute for Economic Research.
    16. Bas Weel, 2018. "The Rise of Temporary Work in Europe," De Economist, Springer, vol. 166(4), pages 397-401, December.
    17. Dimitrios Bakas & Yousef Makhlouf, 2020. "Can the insider–outsider theory explain unemployment hysteresis in OECD countries?," Oxford Economic Papers, Oxford University Press, vol. 72(1), pages 149-163.
    18. Priscila Ferreira & George Saridakis, 2017. "Firm Shutdown During the Financial and the Sovereign Debt Crises: Empirical Evidence from Portugal," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 24(2), pages 153-179, May.
    19. Däubler, Wolfgang, 2016. "Wiederaufbau statt Deregulierung in Griechenland," HSI-Working Papers 09, Hugo Sinzheimer Institute for Labour and Social Security Law (HSI), Hans Böckler Foundation.
    20. Zhanat Abzhan & Toty Bekzhanova & Anar Nukesheva & Mirzatilla Abdurakhmanov & Lyazzat Aitkhozhina & Zhanna Bulkhairova, 2020. "Peculiarities of youth unemployment: a case study," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(4), pages 3438-3454, June.

    More about this item

    Keywords

    Okun’s law; Labor market regulations; Time-series regression;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

    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:spr:eurase:v:13:y:2023:i:3:d:10.1007_s40822-023-00235-x. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.