Thursday, February 13, 2014
In an update of our work, Laurence Ball, Daniel Leigh and I find that the link between output growth and employment growth holds strongly in most advanced economies. We find no evidence that this link—which goes by the wonkish name of Okun’s Law—broke down during 2008 to 2013, including in high unemployment countries like Ireland and Spain. On average across the 20 advanced economies we study, a 1 percentage point increase in output growth leads to a ½ percentage point increase in employment growth. We find that Okun’s Law survived the stress test of the Great Recession: there is little evidence that the link between growth and jobs changed appreciably over the course of the Great Recession. The alleged breakdown of Okun’s Law is often a jumping-off point for arguing that structural reforms are needed to make a major dent in unemployment. Our results suggest that while there may be good reasons to recommend structural reforms to boost employment, proposing them in the belief that Okun’s Law has broken down should not be one of them.
In related work, Laurence Ball, Joao Jalles and I find that forecasters believe in Okun’s Law. For the nine advanced economies we study, the estimates of the Okun’s coefficients from forecasts is fairly similar to that in the data for various countries.
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