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What’s behind Okun’s law? A multiple equation approach to the Uruguayan labour market

Author

Listed:
  • M. Sylvina Porras-Arena

    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

  • Mauricio A. Suárez Cal

    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

Abstract

The objective of this research is to overcome the limitations of conventional Okun's coefficient estimations, highlighting the indirect nature of the effect of the GDP over the unemployment rate. To do so, we estimate a multiple equation model composed by a labour demand, a labour supply and a real wages equation. Our results shed light on the determinants of the demand, the supply and wages. We found that both labour demand and supply react positively to GDP and negatively to wages, but the supply side with lower intensity than demand with respect to both variables. Based on simulations of shocks, we analysed how the variations of the GDP impact on unemployment and found that the effect is not as large as previous research have presented. This result suggests that the estimation of Okun's coefficient arising from a single equation model with only unemployment and GDP as variables suffers from the omitted variables bias, as it captures part of the effects of other variables that affect labour demand and/or labour supply.

Suggested Citation

  • M. Sylvina Porras-Arena & Mauricio A. Suárez Cal, 2021. "What’s behind Okun’s law? A multiple equation approach to the Uruguayan labour market," Documentos de Trabajo (working papers) 21-30, Instituto de Economía - IECON.
    • Handle: RePEc:ulr:wpaper:dt-30-21
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    File URL: https://hdl.handle.net/20.500.12008/30953
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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