Tuesday, April 22, 2014
Over the past few years, the IMF has argued that Okun isn’t brokun’—the relationship between output growth and unemployment remains tight. We’ve done so here, here, here, here, here, and here. Hear! Hear! Finally it seems we’re being heard.
An independent study by the San Francisco Fed—independent in the sense that it seems unaware of any of the 6 links given above—finds that rumors of the demise of Okun’s Law may have been exaggerated; see the WSJ story on the study.
For those tempted to say, “yes, that’s the U.S. but my country is different,” see the evidence we provide in one of the six links above on how well Okun’s Law fits for advanced economies, including high unemployment countries like Spain.
Why does it matter whether Okun’s Law holds? It’s because the alleged demise of Okun’s Law is often used as a jumping-off point to argue that the link between jobs and growth is broken, so structural reforms are needed to restore job creation. The stability of Okun’s Law, combined with evidence that the Beveridge Curve is looping back to normality, as noted by Krugman, suggests that cyclical factors may still be behind the weakness in labor markets.
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