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Post-recession US Employment through the Lens of a Non-linear Okun's law

  • Menzie D. Chinn
  • Laurent Ferrara
  • Valérie Mignon

This paper aims at investigating the relationship between employment and GDP in the United States. We disentangle trend and cyclical employment components by estimating a non-linear Okun's law based on a smooth transition error-correction model that simultaneously accounts for long-term relationships between growth and employment and short-run instability over the business cycle. Our findings based on out-of-sample conditional forecasts show that, since the exit of the 2008-09 recession, US employment is on average around 1% below the level implied by the long run output-employment relationship, meaning that about 1.2 million of the trend employment loss cannot be attributed to the identified cyclical factors.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19047.

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Date of creation: May 2013
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Handle: RePEc:nbr:nberwo:19047
Note: EFG
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  1. Jesse Rothstein, 2012. "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations," NBER Working Papers 17966, National Bureau of Economic Research, Inc.
  2. Edward P. Lazear & James R. Spletzer, 2012. "The United States Labor Market: Status Quo or A New Normal?," NBER Working Papers 18386, National Bureau of Economic Research, Inc.
  3. Jinzhu Chen & Bharat Trehan & Prakash Kannan & Prakash Loungani, 2011. "New Evidenceon Cyclical and Structural Sources of Unemployment," IMF Working Papers 11/106, International Monetary Fund.
  4. van Dijk, D.J.C. & Terasvirta, T. & Franses, Ph.H.B.F., 2000. "Smooth transition autoregressive models - A survey of recent developments," Econometric Institute Research Papers EI 2000-23/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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  9. Li, Jing, 2011. "Bootstrap prediction intervals for SETAR models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 320-332.
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  11. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  12. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
  13. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
  14. Brian Silverstone & Richard Harris, 2001. "Testing for asymmetry in Okun's law: A cross-country comparison," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-13.
  15. Viren, Matti, 2001. "The Okun curve is non-linear," Economics Letters, Elsevier, vol. 70(2), pages 253-257, February.
  16. Laurence M. Ball & Daniel Leigh & Prakash Loungani, 2013. "Okun's Law: Fit at Fifty?," NBER Working Papers 18668, National Bureau of Economic Research, Inc.
  17. Bec, Frédérique & Bouabdallah, Othman & Ferrara, Laurent, 2014. "The way out of recessions: A forecasting analysis for some Euro area countries," International Journal of Forecasting, Elsevier, vol. 30(3), pages 539-549.
  18. 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.
  19. 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.
  20. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," SSE/EFI Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
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