Beyond Okun’s Law: Output Growth and Labor Market Flows

From a new Tinbergen Institute Discussion Paper:

“Recently, in an important paper, Ball et al. (2017) investigated the Okun relationship for the US and 20 other advanced economies. Focusing on the fit of the relationship between the unemployment rate and output (using both the gap and difference form of Okun’s Law) they find for US data over the sample period 1948-2013 that Okun’s law is a strong, reliable and stable relationship and that a constant (not time-varying) Okun coefficient is a good approximation to reality. They also noted that the Okun coefficient appears to be larger during recessions than during expansions. How can we reconcile empirical evidence that Okun’s coefficient is stable over time, while being asymmetric over the business cycle?

Our paper proposes another look at the relationship between changes in the unemployment rate and output growth through the lens of labor market flows. As far as we know, no one has utilized flows data in this context. Yet clearly the change in the unemployment rate reflects the balance of flows into and out of unemployment within a period and thus it is natural to look at the Okun relationship as a relationship between output growth and labor market flows.”

Posted by at 8:46 PM

Labels: Inclusive Growth


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