Working Paper: CEPR ID: DP17369
Authors: Claudia Foroni; Francesco Furlanetto
Abstract: Despite its stability over time, as for any statistical relationship, Okun's law is subject to deviations that can be large at times. In this paper, we provide a mapping between residuals in Okun's regressions and structural shocks identified using a SVAR model by inspecting how unemployment responds to the state of the economy. We show that deviations from Okun's law are a natural and expected outcome once one takes a multi-shock perspective, as long as shocks to automation, labor supply and structural factors in the labor market are taken into account. Our simple recipe for policy makers is that, if a positive deviation from Okun's law arises, it is likely to be generated by either positive labor supply or automation shocks or by negative structural factors shocks.
Keywords: Okun's Law; Labor Markets; Business Cycle Fluctuations; Bayesian VAR
JEL Codes: E24; E32; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| automation shocks (C69) | deviations from Okun's law (E39) |
| labor supply shocks (J20) | deviations from Okun's law (E39) |
| negative structural factors shocks (E71) | deviations from Okun's law (E39) |
| positive deviations from Okun's law (E39) | positive labor supply shocks (J20) |
| positive deviations from Okun's law (E39) | positive automation shocks (E32) |
| higher unemployment (J64) | positive unusual shocks (D80) |
| structural factors shocks (E32) | unemployment (J64) |
| structural factors shocks (E32) | output (C67) |