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Explaining Deviations from Okun’s Law

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  • Claudia Foroni
  • Francesco Furlanetto

Abstract

Despite its stability over time, as for any statistical relationship, Okun’s law is subject to deviations that can be large at times. In this paper, we provide a mapping between residuals in Okun’s regressions and structural shocks identified using a SVAR model by inspecting how unemployment responds to the state of the economy. We show that deviations from Okun’s law are a natural and expected outcome once one takes a multi-shock perspective, as long as shocks to automation, labor supply and structural factors in the labor market are taken into account. Our simple recipe for policy makers is that, if a positive deviation from Okun’s law arises, it is likely to be generated by either positive labor supply or automation shocks or by negative structural factors shocks.

Suggested Citation

  • Claudia Foroni & Francesco Furlanetto, 2022. "Explaining Deviations from Okun’s Law," Working Paper 2022/4, Norges Bank.
    • Handle: RePEc:bno:worpap:2022_4
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    File URL: https://hdl.handle.net/11250/2997497
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    More about this item

    Keywords

    Okun’s law; Labor markets; Business cycle fluctuations; Bayesian VAR;
    All these keywords.

    JEL classification:

    • 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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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