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Okun's Law: Fit at Fifty?

  • Laurence M. Ball
  • Daniel Leigh
  • Prakash Loungani

This paper asks how well Okun's Law fits short-run unemployment movements in the United States since 1948 and in twenty advanced economies since 1980. We find that Okun's Law is a strong and stable relationship in most countries, one that did not change substantially during the Great Recession. Accounts of breakdowns in the Law, such as the emergence of "jobless recoveries," are flawed. We also find that the coefficient in the relationship - the effect of a one percent change in output on the unemployment rate - varies substantially across countries. This variation is partly explained by idiosyncratic features of national labor markets, but it is not related to differences in employment protection legislation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18668.

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Date of creation: Jan 2013
Date of revision:
Handle: RePEc:nbr:nberwo:18668
Note: EFG ME
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  1. Michael Elsby & Bart Hobijn & Aysegül Sahin, 2010. "The labor market in the Great Recession," Working Paper Series 2010-07, Federal Reserve Bank of San Francisco.
  2. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
  3. Ono, Hiroshi, 2006. "Lifetime Employment in Japan: Concepts and Measurements," SSE/EFI Working Paper Series in Economics and Finance 624, Stockholm School of Economics, revised 06 Apr 2007.
  4. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  5. Samuel Bentolila & Pierre Cahuc & Juan Jose Dolado & Thomas Le Barbanchon, 2010. "Two-Tier Labor Markets in the Great Recession: France vs. Spain," CESifo Working Paper Series 3269, CESifo Group Munich.
  6. Robert J. Gordon, 2010. "Okun's Law and Productivity Innovations," American Economic Review, American Economic Association, vol. 100(2), pages 11-15, May.
  7. Owyang, Michael T. & Sekhposyan, Tatevik, 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.
  8. Donald W. K. Andrews, 2003. "Tests for Parameter Instability and Structural Change with Unknown Change Point: A Corrigendum," Econometrica, Econometric Society, vol. 71(1), pages 395-397, January.
  9. Edward S. Knotek & II, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-103.
  10. Brent Meyer & Murat Tasci, 2012. "An unstable Okun’s Law, not the best rule of thumb," Economic Commentary, Federal Reserve Bank of Cleveland, issue June.
  11. repec:fip:fedcec:y:2012:i:jun7:n:2012-8 is not listed on IDEAS
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