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The Updated Okun Method for Estimation of Potential Output with Broad Measures of Labor Underutilization: An Empirical Analysis

Author

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  • Claudia Fontanari

    (Roma Tre University.)

  • Antonella Palumbo

    (Roma Tre University.)

  • Chiara Salvatori

    (Roma Tre University.)

Abstract

This paper extends to different indicators of labor underutilization the Updated Okun Method (UOM) for estimation of potential output proposed in Fontanari et al (2020), which, from a demand-led growth perspective, regards potential output as an empirical approximation to full-employment output, as in A.M.Okun`s (1962) original method. Based on the apparent incapability of the official rate of unemployment to fully account for labor underutilization, in this paper we offer estimates of Okun`s law both with broad unemployment indicators and with an indicator of `standardized hours worked` which we propose as a novel measure of the labor input. The paper reflects on the possible different empirical measures of full employment. The various measures of potential output that we extract from our analysis show greater output gaps than those produced by standard methods, thus highlighting a systematic tendency of the latter to underestimate potential output. Output gaps that underestimate the size of the output loss or that tend to close too soon during recovery, may produce a bias towards untimely restriction.

Suggested Citation

  • Claudia Fontanari & Antonella Palumbo & Chiara Salvatori, 2021. "The Updated Okun Method for Estimation of Potential Output with Broad Measures of Labor Underutilization: An Empirical Analysis," Working Papers Series inetwp158, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp158
    DOI: 10.36687/inetwp158
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    File URL: https://doi.org/10.36687/inetwp158
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    More about this item

    Keywords

    potential output; alternative unemployment indicators; Okun`s law; demand-led growth;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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