However, they add that these shifts do not always lead to significant changes In conclusion, the authors suggest that the Okun’s law “should not be taken too seriously but rather as an approximation taken with a grain of salt” In a sharp contrast, Freeman (2000) finds that the value of Okun’s coefficient is stable around 2 for all time periods and across regions in the United States regardless of how equilibrium output and employment are measured The author finds that the original estimates of 3% change in real output for every 1% change in the unemployment rate has been reduced to 20-25 Freeman’s position is corroborated by Ball et al (2013) who suggest that there is a high degree of stability in the
Okun’s Relationship in Most Countries
While acknowledging that there are instances of deviations from the Okun’s law, the authors are quick to point out that these deviations are normally modest in size and for only short periods Ball et al also finds that while the law appears to be stable across countries, the coefficient of interest, that is, the effect of a 1% change in output on the unemployment rate differs across countries and they attribute these differences to the special features of the labor market in each country
The next section describes the Okun’s law and the various ways of estimating it
What is Okun’s law?
Historically, economists have been aware of the inverse relationship between the rate of unemployment and the growth rate of real output However, this relationship was statistically formalized by Okun (1962) who observed the actual extent to which to which a change in real output growth is inversely related to the rate of unemployment This statistically observed relationship has come to be known as the Okun’s law Okun (1962) used Gross National Product and unemployment data for the United States to show that a one percentage point decline (rise) in the rate of unemployment was associated with approximately a three percentage point rise (fall) I real output growth In addition, based on past relationship between Gross National Product and unemployment, Okun attempted to predict Potential GNP by using the relationship between real GNP gap and unemployment rate gap He was; however, quick to add that a change in the unemployment rate does not necessarily determine the magnitude of a change in real output since there may be other factors output growth, such as labor productivity
Received on Sun Nov 29 2020 - 17:16:18 CET