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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
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Handle: RePEc:nbr:nberwo:18668
Note: EFG ME
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  1. Bart Hobijn & Aysegul Sahin & Michael Elsby, 2010. "The Labor Market in the Great Recession," 2010 Meeting Papers 323, Society for Economic Dynamics.
  2. 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.
  3. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  4. 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.
  5. repec:fip:fedcec:y:2012:i:jun7:n:2012-8 is not listed on IDEAS
  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. 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.
  8. 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.
  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. 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.
  11. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
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