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On the Time‐Varying Relationship between Unemployment and Output: What shapes it?
Author(s) -
Jalles João Tovar
Publication year - 2019
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12200
Subject(s) - okun's law , economics , unemployment , business cycle , econometrics , sample (material) , output gap , dispersion (optics) , macroeconomics , monetary policy , unemployment rate , chemistry , physics , chromatography , optics
This paper revisits, by means of both time series and panel data analyses, the empirical regularity popularized by Okun's (Proc Bus Econ Sect, 98‐103, 1962) seminal paper focusing on a sample of 20 advanced economies between 1978 and 2015. Not only do we provide arguably better estimates of the Okun's Law coefficient ( OLC ) (using the gap version) by employing a new filtering technique, but more importantly, we also contest the hypothesis that the OLC has been static over time. By estimating country‐specific time‐varying Okun coefficient models, we confirm that the unemployment‐output responsiveness has been changing over time. The dispersion between countries’ OLC s has been determined by some (structural) characteristics. The starting level of unemployment and the phase of the business cycle increase the estimated OLC s, while informality and certain labour and product market policies lower them. Our evidence sustains the fact that aggregate demand policies aiming at increasing output growth can equally contribute to the recovery in labour markets.