Working Paper: NBER ID: w18668
Authors: Laurence M. Ball; Daniel Leigh; Prakash Loungani
Abstract: This paper asks how well Okun's Law fits short-run unemployment movements in the United States since 1948 and in twenty advanced economies since 1980. We find that Okun's Law is a strong and stable relationship in most countries, one that did not change substantially during the Great Recession. Accounts of breakdowns in the Law, such as the emergence of "jobless recoveries," are flawed. We also find that the coefficient in the relationship - the effect of a one percent change in output on the unemployment rate - varies substantially across countries. This variation is partly explained by idiosyncratic features of national labor markets, but it is not related to differences in employment protection legislation.
Keywords: No keywords provided
JEL Codes: E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts in aggregate demand (E00) | fluctuations in output (E32) |
| fluctuations in output (E32) | employment (J68) |
| employment (J68) | unemployment rate (J64) |
| Okun's law (E24) | relationship between output and unemployment (E24) |
| a one percent change in output (E23) | corresponding change in unemployment (J64) |
| the coefficient in Okun's law varies by country (O57) | relationship influenced by national labor market characteristics (J29) |
| deviations from Okun's law (E39) | modest and short-lived fluctuations in unemployment (J64) |
| fluctuations in unemployment (J64) | shifts in aggregate demand (E00) |
| Okun's law holds when accounting for cross-country differences (O57) | reliable guide to understanding unemployment movements (J60) |