Working Paper: CEPR ID: DP13369
Authors: C. Lim Guay; Robert Dixon; Jan C. van Ours
Abstract: This paper studies the relationship between the change in the unemployment rate and output growth using an approach based on labor market flows. The framework shows why the Okun coefficient may be constant/time-varying and/or symmetric/asymmetric and that the outcome lies with the behavior of the labor flows in response to growth. The encompassing framework nests the conditions to determine the properties of the Okun coefficient without the need to rely on retrospective arbitrary dating of recessions. The framework also highlights the potential misspecification in conventional models of Okun's Law unless stringent conditions are assumed about the behavior of labor flows. The empirical analysis is based on the stock-consistent labor market flows data developed by the BLS for the period 1990:2-2017:3.
Keywords: Labor Flows; Time-Varying; Okun; Asymmetry
JEL Codes: E24; E32; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output growth (O40) | change in the unemployment rate (J64) |
| output growth (O40) | net labor flows (F16) |
| net labor flows (F16) | change in the unemployment rate (J64) |
| output growth (O40) | net flows from unemployment to not in the labor force (J69) |
| output growth (O40) | net flows from employment to not in the labor force (J69) |
| contractionary periods (E32) | Okun coefficient (C29) |
| expansionary periods (E32) | Okun coefficient (C29) |