Working Paper: NBER ID: w19047
Authors: Menzie D. Chinn; Laurent Ferrara; Valrie Mignon
Abstract: This paper aims at investigating the relationship between employment and GDP in the United States. We disentangle trend and cyclical employment components by estimating a non-linear Okun's law based on a smooth transition error-correction model that simultaneously accounts for long-term relationships between growth and employment and short-run instability over the business cycle. Our findings based on out-of-sample conditional forecasts show that, since the exit of the 2008-09 recession, US employment is on average around 1% below the level implied by the long run output-employment relationship, meaning that about 1.2 million of the trend employment loss cannot be attributed to the identified cyclical factors.
Keywords: employment; GDP; Okun's law; nonlinear; business cycle
JEL Codes: C22; E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employment decline (J63) | loss of approximately 12 million jobs (F66) |
| employment is 1.05% below potential level (E24) | non-cyclical factors influence employment (J29) |
| not accounting for long-term relationship (C29) | overestimating employment (J68) |
| observed employment dynamics (J60) | do not align with Okun's law predictions (E39) |