IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v46y2014i31p3828-3835.html
   My bibliography  Save this article

Can the baseline search and matching model quantitatively explain Okun's law?

Author

Listed:
  • Cheuk Yin Ho

Abstract

Okun's Law is an empirically observed, negative relationship between changes in an economy's unemployment rate and its growth rate of output. The baseline search and matching model with stochastic labour productivity fails to match the Okun's coefficient, because it generates a too low unemployment volatility and a too high correlation between labour productivity and unemployment. The model is capable of matching the coefficient if it is extended with an addition of employment separation shocks plus a high calibrated value of nonmarket activities. This article also shows that changes in the stochastic properties of exogenous shocks could explain changes in the Okun's coefficient in the Great Moderation (1984-2007).

Suggested Citation

  • Cheuk Yin Ho, 2014. "Can the baseline search and matching model quantitatively explain Okun's law?," Applied Economics, Taylor & Francis Journals, vol. 46(31), pages 3828-3835, November.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:31:p:3828-3835
    DOI: 10.1080/00036846.2014.943884
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00036846.2014.943884
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/00036846.2014.943884?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. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    3. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe," NBER Working Papers 17429, National Bureau of Economic Research, Inc.
    4. 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.
    5. Alejandro Justiniano & Claudio Michelacci, 2012. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the United States and Europe," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 169-235.
    6. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
    7. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    8. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
    9. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1013-1025, November.
    10. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    11. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    12. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    13. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    14. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    15. Margaret M. McConnell & Gabriel Perez-Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    16. Miyamoto, Hiroaki, 2011. "Cyclical behavior of unemployment and job vacancies in Japan," Japan and the World Economy, Elsevier, vol. 23(3), pages 214-225.
    17. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
    18. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mutascu, Mihai & Sokic, Alexandre, 2021. "Okun's law in the US: New insights in time and frequency," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 207-222.

    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. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    2. Matthias S. Hertweck & Vivien Lewis & Stefania Villa, 2021. "Going the Extra Mile: Effort by Workers and Job‐Seekers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2099-2127, December.
    3. Miyamoto, Hiroaki, 2011. "Cyclical behavior of unemployment and job vacancies in Japan," Japan and the World Economy, Elsevier, vol. 23(3), pages 214-225.
    4. Amaral, Pedro S. & Tasci, Murat, 2016. "The cyclical behavior of equilibrium unemployment and vacancies across OECD countries," European Economic Review, Elsevier, vol. 84(C), pages 184-201.
    5. Epstein, Brendan & Nunn, Ryan & Orak, Musa & Patel, Elena, 2023. "Taxation, social welfare, and labor market frictions," European Economic Review, Elsevier, vol. 151(C).
    6. Tsasa, Jean-Paul K., 2022. "Labor market volatility in a fully specified RBC search model: An analytical investigation," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    7. Domenico Ferraro, 2018. "The Asymmetric Cyclical Behavior of the U.S. Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 145-162, October.
    8. Gabriele Cardullo, 2010. "Matching Models Under Scrutiny: An Appraisal Of The Shimer Puzzle," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 622-656, September.
    9. Kohlbrecher, Britta & Merkl, Christian & Nordmeier, Daniela, 2016. "Revisiting the matching function," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 350-374.
    10. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    11. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    12. Benedikt Herz & Thijs van Rens, 2020. "Accounting for Mismatch Unemployment," Journal of the European Economic Association, European Economic Association, vol. 18(4), pages 1619-1654.
    13. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    14. Kato, Ryuta Ray & Miyamoto, Hiroaki, 2013. "Fiscal stimulus and labor market dynamics in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 33-58.
    15. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h481l2tb5 is not listed on IDEAS
    16. Kuo Chun-Hung & Miyamoto Hiroaki, 2019. "Fiscal stimulus and unemployment dynamics," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(2), pages 1-19, June.
    17. repec:hal:spmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    18. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-1750, June.
    19. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2021. "Italian Labour Frictions and Wage Rigidities in an Estimated DSGE," BEMPS - Bozen Economics & Management Paper Series BEMPS88, Faculty of Economics and Management at the Free University of Bozen.
    20. repec:hal:wpspec:info:hdl:2441/1787nsa6d1927a90u4bkkombn4 is not listed on IDEAS
    21. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    22. Masanori Kashiwagi, 2018. "The Welfare Consequences Of A Quantitative Search And Matching Approach To The Labor Market," Bulletin of Economic Research, Wiley Blackwell, vol. 70(4), pages 423-442, October.
    23. repec:hal:spmain:info:hdl:2441/1787nsa6d1927a90u4bkkombn4 is not listed on IDEAS
    24. James Costain & Marcel Jansen, 2010. "Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 782-811, December.

    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:taf:applec:v:46:y:2014:i:31:p:3828-3835. 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: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    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.