Heterogenous Existence And Size Of Okun’S Law In The European Regions

This paper provides new evidence on the existence and magnitude of Okun's law across the European NUTS2 regions. We first estimate Okun's coefficients for each of the 228 regions over the period 2000-2020 using the Common Correlated Effects Mean Group (CCEMG) estimator. The results reveal significant heterogeneity, with only 42 regions demonstrating the expected negative relationship between unemployment and output, while it is insignificant in the remaining regions. We then introduce a double-hurdle model to explain two key aspects: a probit equation identifies the factors that contribute to the presence of Okun's law, while a tobit model uncovers the short-term or structural determinants of its strength where it exists. We find that the prevalence of Okun's law is influenced by the size of the informal labour sector, the labour inactivity trap, the share of value-added from agriculture, and the proportion of older workers. Meanwhile, the magnitude of the unemployment response to GDP growth is shaped by the inflation rate, working hours, the share of young workers, and labour mobility among low-skilled workers. The construction sector has opposite effects on the probability and strength of Okun's law. Thus, national and regional policies must be combined to effectively reduce unemployment.