The Unassuming Economist

This paper investigates how well Okun’s Law explains short-run unemployment movements in the United States since 1948 and in a sample of 20 advanced economies since 1980. Our principal conclusion is that Okun’s Law is a strong and stable relationship in most countries. Also, the coefficient in the relationship—the effect of a one percent change in output on the unemployment rate—varies substantially across countries. We take a first look at the sources of these differences; one finding is that they are not explained by differences in employment protection laws. Finally, we find that Okun’s Law held up well during the Great Recession and that recoveries have not become “jobless” in the sense of a breakdown in Okun’s Law. The paper is available here.

United States: Actual and Fitted Unemployment Rate, 1948Q2-2011Q4