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Explaining deviations from Okun’s law

Author

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  • Foroni, Claudia
  • Furlanetto, Francesco

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 with 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, labour supply and structural factors in the labour 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 labour supply or automation shocks or by negative structural factors shocks. JEL Classification: E24, E32, C32

Suggested Citation

  • Foroni, Claudia & Furlanetto, Francesco, 2022. "Explaining deviations from Okun’s law," Working Paper Series 2699, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222699
    Note: 3243564
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    Keywords

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    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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