Okun's law

In this study, the relationship between economic growth and unemployment in the euro area (eurozone) is investigated in the light of Okun's Law by using annual panel data set covering the period 2000-2012. Besides panel error correction and panel integration methods are used to test the link between unemployment and growth rate, unemployment hysteresis was examined by using several non-stationary panel unit root techniques for in all countries included to the study. Findings of this study propose that the Okun's Law is valid. However, the cointegration coefficient is lower than the Okun's coefficient calculated for the United States and other studies which was done for developed countries. The US is included in the analysis as it has the strongest economy in the world. In addition, since growth and unemployment are more volatile in developing countries, they are included in the analysis in order to compare with developed countries.

Forgone output resulting from unemployment is a real concern for many countries including the United Kingdom
which managed to keep its unemployment rate at an average of 7% over the last 43 years. This paper provides an assessment of the unemployment-output relationship by examining the validity of Okun’s law, using quarterly time series data from 1971- 2013. The empirical evidences show negative correlation, implying that Okun’s law interpretation is applicable to United Kingdom, with economic growth rate of 1.8% required to keep unemployment constant. Meanwhile, the evolution of the unemployment rate is also influenced by other unforeseen variables like productivity, severe winter weather condition and the Diamond Jubilee in 2012.

Employment is linked to growth at least in the long-run. Thus, to reduce structurally unemployment it is necessary to boost growth. Thus, any strategy seeking to reduce unemployment must be devised with a good knowledge of the growth content in terms of jobs. In this paper, we use Okun’s law, arc point elasticity, and a simple econometric model to assess the intensity of the links between economic growth and (un)employment in Morocco. Okun’s law provides evidence that economic growth in Morocco is linked with a reduction of the unemployment rate. The sectors intensities to create jobs are very different and provide unsystematic results. Using an average measure of elasticity over the period 1999-2009, we find that many sectors were net losers of jobs. The overall growth-elasticity of employment is positive but low.

Öz: Bu çalışmanın amacı, işsizlik ve ekonomik büyüme arasındaki ters ilişkiyi açıklayan Okun yasasının Mısır için geçerliliğinin test edilmesidir. Çalışmada bu amaca ulaşmak için 1970-2016 yılları arasındaki işsizlik ve milli gelir verileri kullanılmıştır. İlk olarak Okun tarafından ortaya konan model regresyon yöntemi kullanılarak analiz edilmiş, Okun katsayısı tespit edilmiştir. Daha sonra, değişkenler arasındaki nedensellik ilişkisinin araştırılması amacıyla Granger Nedensellik testi uygulanmıştır. Yapılan analiz sonucunda, Okun tarafından belirtilen şekilde katsayının işareti negatif bulunmuş ancak katsayı Yasada belirtilenden çok düşük çıkmıştır. İkinci aşamada yapılan nedensellik testinde de iki değişken arasında ilişki bulunamamıştır. Sonuç olarak, katsayı Okun Yasasına uygun olarak negatif çıkmış olsa da, hem nedensellik analizi sonucu dikkate alındığında hem de tarihsel süreç göz önünde bulundurulduğunda Mısır için Okun Yasasının iktisadi olarak geçerli olamayacağı sonucuna ulaşılmıştır. Abstract: The aim of this study is to test the validity of the Okun law for Egypt, which explains the inverse relationship between unemployment and economic growth. Unemployment and output data between 1970 and 2016 were used to reach this aim in the study. First, the model was analyzed by using regression method set out by Okun, and the Okun coefficient was determined. Then, the Granger Causality test was applied to determine the causality relation between the variables. As a result of the analysis made, the sign of the coefficient was found to be negative, as indicated by the model, but the coefficient was too low to be specified. On the other hand, there was no relationship between the two variables in the second-stage causality test. As a result, even though the coefficient was negative in accordance with the Okun Law, when the result of the causality test and Egypt's economic structures are taken into consideration, it is concluded that the Okun Law for Egypt can not be economically viable.

Okun’s law, named for its proposer, Arthur Okun, was first applied during the 1960s in
the USA to describe the relationship between economic growth and unemployment fluctuations. Several
attempts were later made to test the empirical applicability of the relationship to different countries and
historical periods. Heterogeneous results were generally found in estimating Okun’s coefficient, depending
on the sample and context analysed.
The main goal of this paper is to analyze the relevance of Okun’s law to Italian regions. We perform
a panel analysis to estimate the influence of asymmetry and local market differences on Okun’s relationship.
Moreover, observing particularly low values of participation rate in labor markets in southern areas,
we propose other indicators to estimate Okun’s coefficient which are more compatible with a delayed
development area.

The main objective of the study is to trace out the evidence about the possible affiliation between level of unemployment and growth rate of output which was proposed empirically by Arthur Okun in early sixties. To perform this multivariate time series data has utilized ranges the period from 1972 to 2019 of Pakistan. To access the association and to quantify the magnitude of relationship ARDL, bound test approach utilized. To check the order of integration ADF (Augmented Dicky Fuller) test applied. Paper confirmed the existence of inverse affiliation between level of unemployment and growth of output in Pakistan. But the intensity of association is very low, suggests that the political unrests and lack of attention of policy makers toward factor markets hampers the employment creation effect of growth of output. To check the pattern of association Granger causality test uses that prescribed the existence of unidirectional affiliation through unemployment to growth rate of output in Pakistan.

Purpose- The purpose of this study is to investigate whether there is an asymmetric relationship between economic growth and unemployment in Turkey.
Methodology- In assessing this relationship, quarterly unemployment rate and GDP data for the period between 2000-2019 were examined. Assessment of the relationship between these variables (aggregate values) was first analyzed using a Johansen cointegration test based on a system approach. While no evidence of a cointegration relationship was found, the possibility of a hidden cointegration was assessed and these variables were decomposed into positive and negative values as suggested by Granger and Yoon (2002). The asymmetric causality relationship between these variables was then evaluated using the decomposition process approach suggested by Hatemi-J and Irandoust (2012) approach.
Findings- The results of this research demonstrate an asymmetric cointegration and an asymmetric one-way causality relationship between these variables.
Conclusion- The fact that the unemployment that emerged during the contraction periods of the economy did not recover even after the economy transitioned to an expansion phase demonstrates the critical importance of the economic policies that should be implemented in times of crisis.

Brazil currently faces unemployment rates that reach about thirteen million Brazilians. This phenomenon results, in part, from mismatched economic policies over the years, rising inflation, uncontrolled public accounts, and the instability and insecurity generated by the political crisis that began in 2014. The aim of this article is to contribute to the literature on unemployment in Brazil based on empirical evidence of Okun's law for the short-term during the period 2012-2019 comparing two scenarios: one of stability and the other with effects of political crisis. To capture the output gap and unemployment deviations, the Hamilton filter combined with regressions by ARDL models was applied. The results indicate that for the 1% reduction in the unemployment rate, the average production growth above its trend is expected to be 0.18% per month uninterruptedly during a semester. This percentage increases to 0.29% per month in the event of structural, political, institutional or reliable crisis.

The large and growing literature on financialization has focused on identifying the expansion of the financial sector into various realms of economies and societies, as well as analysing its effects on economic growth, employment, inequality and democracy, among other variables. Most works in this literature, however, still use standard indicators such as Gross Domestic Product (GDP) for empirically defining and examining the scope of financialization or the extent of its impacts. This paper builds on recent research focusing on the financialization of GDP itself. While the original measure in the 1930s and 1940s was designed to capture the production of measurable output, subsequent updates to the national accounting framework shifted the production boundary (which determines what gets counted in GDP) to cover more services, including those for which there is no direct measure of output. In particular, the 'value-added' of financial services is imputed based on banks' revenues and costs, and the inclusion of such income in GDP has caused a deterioration in its correlation with measures of employment and median income, as well as in its performance as a leading indicator. Using new data and treating financial revenues as a cost to the overall economy, a new measure – Final GDP – performs better than GDP on all three fronts. It also sheds light on several unresolved empirical debates in macroeconomics. First, the phenomenon of the Great Moderation of fluctuations in output appears to be a statistical artefact, as the inclusion of finance in GDP smooths over volatility as well as trends of secular stagnation. Second, the spurious breakdown of Okun's Law also turns out to be a figment of the data, since GDP by construction has been diverging from employment and aggregate demand. Jobless growth recoveries thus turn out to be merely periods of stagnation when employment growth is naturally subdued. Finally, using in-sample forecasting, FGDP outperforms GDP as a leading indicator, foretelling the Great Recession earlier and more clearly than the standard measure. The paper concludes by assessing some broader implications of the finalization of GDP for economics and politics.

The largest single cost of unemployment is lost production. People who cannot work do not produce – high unemployment makes the social pie smaller. Since short-run trade-offs exist between unemployment, inflation and Gross Domestic Product growth, it is also important to get a better understanding of the relative economic costs that is involve. This study provides some input for policymakers’ evaluation of the trade-offs. For the reason that the dynamic of output-unemployment link in Nigeria are somewhat more complicated and defile some economic theories. Thus, this paper present a ballpark methods from Okun’s law, Philips curve to Ball’s sacrifice ratio, that bear directly on measuring the short-run and long-run trade-offs. With a sacrifice ratio of 4, that is found by this study, policymakers will have to frequently decide how hard to fight an inflationary shock, knowing that the less they accommodate, the more unemployment and less output they will achieve.

Autor: José Niño Díaz

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En  este  artículo  se  efectúan  estimaciones  del  Producto  Interno  Bruto (PIB)  Potencial  y  de  la  Brecha  del  Producto  mediante  tres  enfoques diferentes,  empleando  observaciones  anuales  para  el  período comprendido  entre  1950  y  2012.  Los  enfoques  empleados  son  filtros lineales, metodología basada en la función de producción y un enfoque relacionado con la denominada ley de Okun.

El  primero  está  basado  en    métodos  estadísticos  que  permiten descomponer series cronológicas en una componente secular y en otra cíclica.  Los  dos  restantes    suponen  la  existencia  de  una  estructura económica  que  puede  ser  representada  mediante  una  determinada forma  funcional  específica  y  pertenecen  a  los  llamados  métodos estructurales.

En  el  caso  de  la  metodología  basada  en  el  enfoque  de  la función  de producción,    mediante  los  modelos  econométricos  estimados,  se obtuvo que existe una relación de largo plazo entre los logaritmos del PIB,  stock  de  capital  y  del  empleo,  con  lo  cual  estas  variables cointegran.

Dado que el PIB Potencial de un país y por consiguiente la Brecha del Producto  son  variables  no  observables,  no  existe  un  método universalmente  empleado  para  estimarlas.  En  este  sentido,  cada método  presenta  ventajas  y  limitaciones  en  su  aplicación  y  deben analizarse con cautela en cada situación específica.

Palabras  clave: PIB  Potencial,  Brecha  del  Producto,  función  de producción, ley de Okun, filtros lineales, cointegración.

English

In  this  article  there  are  effected  estimations  of  the  Internal  Gross Domestic Product (GDP) Potential and of the Output Gap  by means of three  different  approaches,  using  annual  observations  for  the  period understood  between  1950  and 2012.  The  used  approaches  are  linear filters,  methodology  based  on  the  function  of  production  and  an approach related to so called Okun's law.

The  first  approach  is  based  on  statistical  methods  that  allow  to separate  into  its  elements  chronological  series  in  one  secular component  and  in  cyclical  other  one.  Both  remaining  approaches suppose  the  existence  of  an  economic  structure  that  can  be represented by means of a certain specific functional form and belong to the so called structural methods.

In  the  case  ofthe  methodology  based  onthe  approach of the production function, estimated by econometric models, we found that there  is  along-term  relationshipbetween  the  logarithms of  GDP, capitalstockand employment, thus these variables cointegrate.

Due  to  that  a  country's  potential  GDP  and  therefore  the  Output  Gap are  unobservable  variables,  there  is  no  a  method  universally  used  to estimate  them.  In this  sense,  each  method  has  advantages  and limitations in its application and they should be analysed with caution in each specific situation.

Keywords: Potential  GDP,  Output  Gap,  production  function,  Okun's law, linear filters, cointegration.