okun talk at new school by prakash loungani

1

Does One Law Fit All?Cross-Country Evidence on Okun’s Law

Laurence Ball (Johns Hopkins University)Davide Furceri (IMF)Daniel Leigh (IMF)

Prakash Loungani (IMF)

September 10, 2013

Outline of Talk

1. Evidence for 20 OECD countries– Review of “Okun’s Law: Fit at 50?” (Ball, Leigh and Loungani, 2013)– New Evidence on “A Law for the Ages? Okun’s Law by Age Group”

2. Okun Outside OECD– Comparison of Estimates for OECD and non-OECD countries– Determinants of the Okun Coefficient

3. Addressing Issues of Data Quality and Relevance of Unemployment-Based Okun’s Law

– Data Quality: Closer Look at Evidence for Latin America– Relevance: Preliminary Work using Employment

3

Okun’s Law 101

• Okun (1962)

• “Levels” version:

Ut – Ut* = β (Yt – Yt

*) + εt, β < 0,

• “Changes” version:

ΔUt = α + β ΔYt + ωt

• Textbooks say U.S. coefficient β = –0.5.

4

Accusations Against Okun’s Law

• It’s unstable• “An Unstable Okun’s Law, Not the Best Rule of Thumb” (Meyer and

Tasci, St. Louis Fed, 2012)

• It’s dead• “The Demise of Okun’s Law” (Robert Gordon, 2011)

• Recoveries have become “jobless”

• It broke down during Great Recession• April 2010 WEO (“Okun’s Law and Beyond”)

Reasons to care about Okun’s Law

• Along with other indicators, it helps us assess whether an increase in unemployment is cyclical or structural

• If short-run decreases in output are due to declines in aggregate demand, it tells us monetary and fiscal policies may be important in solving ‘the unemployment problem’

• It suggests need for a two-handed approach to solving unemployment (both aggregate demand and aggregate supply matter)

• Statistical check on the quality of GDP and labor market data

• Initial increase cyclical rather than structural

• Greater uncertainty about relative proportions now, but signs that cyclical component remains important in most countries

• Beveridge curve quite stable; moreover shifts may not be sign of increase in natural rate (Diamond 2013)

• Other measures of mismatch back to normal• Lack of deflation not a sign of small

unemployment gap

• Stability of Okun’s Law suggests jobs will return if the growth returns.

Unemployment during the Great Recession

6

Debate in the Blogosphere:Krugman vs. Kocherlakota

“Why is unemployment remaining high? Because growth is weak — period, full stop, end of story. Historically, low or negative growth has meant rising unemployment, fast growth falling unemployment (Okun’s Law) … what we’ve been seeing lately is well within the normal range of noise.”Paul Krugman, July 9, 2011

• Minneapolis Fed president sees mismatch driving unemployment rateMinneapolis PostSep. 10, 2010

• A mismatch of worker skills, the location of available jobs and a less mobile workforce has added 2.5 points to the nation’s unemployment rate.

Present Debate:Kocherlakota vs. Kocherlakota

• A Federal Reserve Governor Announced A Surprising Change-Of-Mind About How He Sees The Economy, Business Insider, Sep. 20, 2012

• Kocherlakota … used to be something of a hawk, arguing that the Fed couldn't do much about unemployment, because the unemployment crisis was "structural" not "cyclical."

• Minneapolis Fed president sees mismatch driving unemployment rateMinneapolis PostSep. 10, 2010

• A mismatch of worker skills, the location of available jobs and a less mobile workforce has added 2.5 points to the nation’s unemployment rate.

9

Debate in the Blogosphere: Krugman vs. McKinsey

“There’s no hint in these data that we’ve entered new territory in which decent growth fails to create jobs; the problem is that we haven’t had decent growth.” Paul Krugman, July 9, 2011

“The U.S. jobs challenge today stems from a pattern of jobless recovery that does not conform to the classic cyclical view of recession and recovery. So while healthy GDP growth will be essential [for a return to full employment], it will probably not be sufficient.... it will require major efforts in education, regulation, and even diplomacy.” McKinsey Global Institute, 2011

A Debate since the 1970s …

• “There is sometimes the naïve belief that unemployment must be due to a defect in the labor market, as if the hole in a flat tire must always be at the bottom, because that is where the tire is flat” (Solow, 2000).

• "It takes a heap of Harberger triangles to fill an Okun's gap.” (Tobin, 1977)

“We impute the higher [European] unemployment to welfare states' diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new information technologies, and a rapidly changing international economy. “(Ljungqvist and Sargent, 1998)

11

What We Do … and What We Find• We examine fit of Okun’s Law:

• In the U.S. since 1948 • In 20 advanced economies since 1980

• What we conclude:• It is a law (at least by the standards of macroeconomics)• Strong and stable in most countries• Exceptions exaggerated and/or quantitatively small

BUT:• substantial variation in coefficient across countries

» for reasons only partly understood

12

Deriving Okun’s Law

(1) Et – Et* = γ (Yt – Yt

*) + ηt γ > 0

(2) Ut – Ut

* = δ (Et – Et *) + μt δ < 0

• We expect γ < 1.5 (labor as quasi-fixed factor)

• We expect |δ| <1 (procyclical labor force participation)

(3) Ut – Ut* = β (Yt – Yt

*) + εt β < 0

• β = γδ, |β|<1.5, and εt = μt + δ ηt.

13

Estimating Okun’s Law(3) Ut – Ut

* = β (Yt – Yt *) + εt β < 0

• We usually measure Ut* and Yt

* with HP filter.

• Several tests of robustness• With HP

» Alternate values of HP smoothing parameter» Addressing end-point problem

• Without HP» Use of forecast errors » Use of CBO measure of Ut

* and Yt *

» Use of “changes” specification

(4) ΔUt = α + β ΔYt + ωt , holds if U * and ΔY * constant.

14

U.S. EVIDENCE ON OKUN’S LAW

15

Results: U.S. Annual Data 1948-2011Levels equation: Ut – Ut

* = β (Yt – Yt *) + εt ,

Changes equation: ΔUt = α + β ΔYt + ωt

Note: OLS standard errors. ***, **, and *: sig. at the 1, 5, and 10 percent level.

λ = 100 λ = 1,000 Changes

β -0.411*** -0.383*** -0.405***(0.024) (0.023) (0.029)

α 1.349***(0.116)

Obs 64 64 63

Adjusted R 2 0.817 0.813 0.752

Levels

16

Results for U.S., 1948-2011(SUR, joint estimation of equations 1-3, annual data, λ = 100)

Note: Standard errors in parentheses. ***, **, and *: sig. at the 1, 5, and 10 percent level.

`

Okun’s Law for Employment Estimate Adjusted R 2

γ 0.543*** 0.610

Unemployment-Employment Relationδ -0.728*** 0.798

Okun’s Law for Unemploymentβ -0.405*** 0.820

Obs

p -value for H0: β = γδ

64

0.378

17

Okun’s Law: U.S. Fit(Levels specification, natural rates based on HP filter, annual data)

1982194919581961

198319752009

2010

196019951962199319631991

20111996

199219761971

197019941959

1997

1954

1964

1974

1950

1981

20032002

194819801957

19841998197719722001

20041985

200819871986

19901965195619992005

19671969198820061989

20001968

2007

19781952

1955

1951197919731966

1953

-2-1

01

2U

ne

mp

loym

en

t ga

p

-6 -4 -2 0 2 4Output gap

= 100

1982

195820111961

200920101983

1949

1960

1975

1962199119931963

1992

1959

199519941996

198119761984

19641957

1980

1948

19541950

1997

19851971

19702008

1977

1974

1986198719901956

19981988

2003

1965

2002

1989

1972 2004200119781979

1955

2007196719992005

195220061951

196919531968197319662000

-2-1

01

23

Un

em

plo

yme

nt

gap

-6 -4 -2 0 2 4Output gap

= 1,000

18

Okun’s Law: U.S. Fit(“Changes” specification, annual data)

2009

19821958

1954

1974

1949

200819801991

1975

1970

2001

2011

2002

199020071956

1957

1961

20101960

1995

196719812003

20061993200519691979

1987

19711992

19862004198919961952

199419881985200019981963

19971983

1977

195319991968

197219761978

19641973

196219651966

1959

1984

1955

1951

1950

-2-1

01

23

4C

han

ge in

une

mp

loym

ent

ra

te

-4 -2 0 2 4 6 8Change in log of real GDP

19

Okun Stability Test, 1948-2011(Test for stability of Okun coefficient, β, at unknown date, annual data)

Note: F-statistic, inner 70 percent of sample. Critical value from Andrews (2003).

10 percent critical value

02

46

8

1950 1960 1970 1980 1990 2000 2010

= 100 = 1,000 Changes

20

Results for U.S.: Quarterly Data(OLS, levels specification: Ut – Ut

* = β(L) (Yt – Yt *) + εt , 1948Q2-2011Q4)


1,600 1,600 16,000 16,000

β0 -0.428*** -0.245*** -0.411*** -0.213***(0.015) (0.0230) (0.013) (0.0286)

β1 -0.133*** -0.153***(0.0345) (0.0447)

β2 -0.116*** -0.0794***(0.0230) (0.0286)

β0 + β1 + β2 -0.494*** -0.445***(0.0126) (0.0119)

α

Obs 256 256 256 256

Adjusted R 2 0.767 0.865 0.795 0.852

Hodrick-Prescott filter λ

21

Replication of Okun (1962) and More(OLS, changes specification: ΔUt = α + β(L) ΔYt + εt)


SampleData

β0 -0.307*** -0.233*** -0.286*** -0.218***(0.036) (0.0303) (0.018) (0.0160)

β1 -0.168*** -0.137***(0.0327) (0.0168)

β2 -0.0394 -0.0767***(0.0307) (0.0160)

β0 + β1 + β2 -0.441*** -0.432***(0.0380) (0.0200)

α 0.305*** 0.424*** 0.244*** 0.359***(0.061) (0.0524) (0.023) (0.0215)

Obs 51 51 255 255

Adjusted R 2 0.584 0.758 0.494 0.663

1948Q2-1960Q4 1948Q2-2011Q4Vintage data Current data

22

Okun’s Law: U.S. Fit, Quarterly Data(Actual and fitted values of unemployment rate, 1948Q2-2011Q4)

Note: Fitted value of Ut based estimate of Ut – Ut* = β (Yt – Yt

*) + εt with λ = 1,600.

02

46

810

12

1950 1960 1970 1980 1990 2000 2010

actual fitted

23

Okun’s Law: U.S. Fit, Quarterly Data(Actual and fitted values of unemployment rate gap, 1948Q2-2011Q4)

Note: Fitted value of Ut – Ut* based estimate of Ut – Ut

* = β (Yt – Yt*) + εt with λ = 1,600.

-2-1

01

23

1950 1960 1970 1980 1990 2000 2010

actual fitted

24

JOBLESS RECOVERIES?

25

Okun’s Law vs. “Jobless Recoveries”

• Popular view:• “Output Came Back, Employment Didn’t” (NPR, 2011)

• Our view:• Okun’s Law holds (as shown in previous slides)• Confusion because recent output recoveries have been

slow.• Point is recognized by some observers

» Krugman (2011)» Gali et al. (2012)

26

A Recovery that Looks Jobless(U.S. during the Great Recession)

Note: HP filter trends through 2007. Assumption: Ut* and ΔYt

* constant thereafter.

pre-recession trend

.85

.9.9

51

2007 2008 2009 2010 2011

Log of GDP

pre-recession normal

46

810

2007 2008 2009 2010 2011

Unemployment Rate

27

A Recovery that Looks Job-full(U.S. During the 1981 Recession)

Note: HP filter trends through 1980. Assumption: Ut* and ΔYt

* constant thereafter.

pre-recession trend

.8.8

5.9

.95

1

1980 1981 1982 1983 1984 1985 1986

Log of GDP

pre-recession normal

78

910

1980 1981 1982 1983 1984 1985 1986

Unemployment Rate

28

EVIDENCE ON OKUN’S LAW FOR 20 OECD COUNTRIES

29

Cross-country Estimates, 1980-2011(OLS, levels specification: Ut – Ut

* = β (Yt – Yt *) + εt , λ = 100, annual data)


β Obs Adj. R 2 β Obs Adj. R 2

Australia -0.536*** 32 0.80 Japan -0.152*** 32 0.65Austria -0.136*** 32 0.21 Netherlands -0.511*** 32 0.62Belgium -0.511*** 32 0.54 New Zealand -0.341*** 32 0.59Canada -0.432*** 32 0.81 Norway -0.294*** 32 0.62Denmark -0.434*** 32 0.72 Portugal -0.268*** 32 0.62Finland -0.504*** 32 0.77 Spain -0.852*** 32 0.90France -0.367*** 32 0.68 Sweden -0.524*** 32 0.62Germany -0.367*** 32 0.51 Switzerland -0.234*** 32 0.44Ireland -0.406*** 32 0.77 UK -0.343*** 32 0.60Italy -0.254*** 32 0.29 USA -0.454*** 32 0.82

30

Cross-country Sub-sample Stability(OLS, levels specification, λ = 100, annual data, 1980-2011)


βpre-95 βpost-95 p -value βpre-95 βpost-95 p -value

Australia -0.552*** -0.433*** 0.405 Japan -0.109*** -0.209*** 0.008Austria -0.134* -0.137** 0.974 Netherlands -0.713*** -0.336*** 0.006Belgium -0.634*** -0.310** 0.053 New Zealand -0.317*** -0.426*** 0.363Canada -0.500*** -0.287*** 0.006 Norway -0.319*** -0.247*** 0.410Denmark -0.490*** -0.369*** 0.205 Portugal -0.221*** -0.463*** 0.007Finland -0.610*** -0.297*** 0.001 Spain -0.793*** -0.923*** 0.205France -0.400*** -0.335*** 0.470 Sweden -0.648*** -0.362*** 0.046Germany -0.427*** -0.270** 0.232 Switzerland -0.211*** -0.274*** 0.516Ireland -0.462*** -0.382*** 0.359 UK -0.419*** -0.215*** 0.045Italy -0.142 -0.358*** 0.110 USA -0.447*** -0.464*** 0.829

31

Summary of Cross-country Estimates

• Strong relationship in most countries. • Coefficient β falls significantly at 5 percent level in 5

countries, rises significantly in 2. • Average β is –0.43 in first sample, –0.35 in second. • Correlation of countries’ βs across periods = 0.50.

32

Okun’s Law and the Great Recession(Peak-to-trough output and unemployment changes)

Notes: Similar to Figure 3.1 in April 2010 WEO.ΣΔU and ΣΔY = cumulative peak-trough changes. Adjusted R2 = –0.03.

USA

GBR

AUT

BEL

DNK

FRA

DEU

ITANLDNOR

SWE

CHE

CAN

JPN

FIN

IRL

PRT

ESP

NZL

02

46

8

U

0 2 4 6 8 10- Y

33

Okun’s Law and the Great Recession(Peak-to-trough changes, adjustment for recession duration, T)

Note: Adjusted R2 = 0.54.

USA

GBR

AUT

BEL

DNK

FRA

DEU

ITANLD NOR

SWE

CHE

CAN

JPN

FIN

IRL

PRT

ESP

NZL

02

46

8

U

1 2 3 4 T + Y

ΔUt = α + β ΔYt

ΣΔU = αT + β Σ ΔY

34

Okun’s Law and the Great Recession(Adjustment for recession duration and country-specific Okun coefficients)

Note: αi and βi = country-specific Okun coefficients, T = duration. Adjusted R2 = 0.76.

USA

GBR

AUT

BEL

DNK

FRA

DEU

ITA NLDNOR

SWE

CHE

CAN

JPN

FIN

IRL

PRT

ESP

NZL

02

46

8

U

0 2 4 6 8i T + i Y

35

SOURCES OF VARIATION IN OKUN’S LAW COEFFICIENTS

36

Cross-Country Variables(Okun coefficient vs. candidate variable)

Note: Average unemployment rate denotes 1980-2011 mean. OECD overall employment protection index: 1985-2011 mean based on available data.

USA

GBR

AUT

BEL

DNK

FRADEU

ITA

NLD

NOR

SW E

CHE

CAN

JPN

FIN

IRL

PRT

ESP

AUS

NZL

-.8

-.6

-.4

-.2

0O

kun

coef

ficie

nt

0 5 10 15Average unemployment rate

USA

GBR

AUT

BEL

DNK

FRADEU

ITA

NLD

NOR

SWE

CHE

CAN

JPN

FIN

IRL

PRT

ESP

AUS

NZL

-.8

-.6

-.4

-.2

0O

kun

co

eff

icie

nt

0 1 2 3 4OECD overall employment protection index

37

Individual Stories

• Large coefficient in Spain: temporary labor contracts

• Three smallest coefficients:

– Japan: lifetime employment tradition

– Switzerland: migrant labor

– Austria: a puzzle

38

Conclusions for OECD Countries

• Strong, stable relationship in most countries.

– Little evidence of jobless recoveries or breakdown in the Great Recession.

• Substantial cross-country variation only partly understood.

39

A LAW FOR THE AGES?OKUN’S COEFFICIENT BY AGE GROUP

Okun’s Law Coefficient: Age Groups (based on “levels” specification)

Spain

Swed

enAu

strali

aFin

land

Portu

gal

Cana

daUn

ited K

ingdo

mNe

ther

lands

Switz

erlan

dJap

an

-2.1

-1.8

-1.5

-1.2

-0.900000000000001

-0.600000000000001

-0.3

0 15-24

Spain

Swed

enFin

land

Switz

erlan

dCa

nada

Belgi

umNo

rway

Portu

gal

Japa

nIta

ly

-2.1

-1.8

-1.5

-1.2

-0.900000000000001

-0.600000000000001

-0.3

0 25-34

Okun’s Law Coefficient: Age Groups(based on “levels” specification)

Spain

Austr

alia

Finlan

dSw

eden

Belgi

umUn

ited K

ingdo

m Franc

eSw

itzer

land Ita

lyAu

stria

-2.1

-1.8

-1.5

-1.2

-0.900000000000001

-0.600000000000001

-0.3

0 35-44

Portu

gal

Cana

daUn

ited K

ingdo

mBe

lgium

Franc

eNo

rway

Swed

enAu

stria Ita

lyAu

strali

a

-2.1

-1.8

-1.5

-1.2

-0.900000000000001

-0.600000000000001

-0.3

0 45-54

Okun’s Law Coefficients: Age Groups(based on “levels” specification)

15-24 25-34 35-44 45-54 55-64-1.2

-0.9

-0.599999999999999

-0.299999999999999

1.33226762955019E-15

0.300000000000002AustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyItalyJapanNetherlandsNew ZealandNorwaySwedenSwitzerlandUnited KingdomUnited States

OKUN OUTSIDE OECD

Growth Strategies vs. Jobs Strategies

Quotes from World Bank’s report on “Jobs” (World Development Report 2013)

“From a statistical point of view, the relationship between growth and employment (or unemployment) shows substantial variation over time, across countries, and across sectors. In light of this diversity, a given rate of growth does not guarantee a given level of job creation or a given composition of employment.”

Growth Strategies vs. Jobs Strategies

Quotes from World Bank’s report on “Jobs” (World Development Report 2013)

• “These elasticities show great variability over time and space, too, making it difficult to forecast net job creation …”

– “in Tanzania growth elasticities of employment declined from 1.04 in the period 1992–96 to 0.27 in the period 2004–08. Similar trends have been reported for Ethiopia, Ghana, and Mozambique.”

– “In Latin America, recent estimates show that growth elasticities of employment were much lower during the global financial crisis than in previous crises. In other words, the Great Recession produced comparatively less net employment destruction in that region.”

Okun’s Law Coefficients: All Countries(based on “change” specification)

Spain

Poland

Tunisi

a

Slovak

Rep

ublic

Finlan

d

United

King

dom

France

Netherl

ands

Bosnia

and H

erzeg

ovina

South

Africa

Belgium

Mold

ova

Switzerl

and

Georg

ia

Panam

a

Nicarag

ua

Albania

Armen

ia

Turke

y

Austri

aIta

ly

Roman

ia

Belaru

s

Domini

can R

epub

lic

Azerb

aijan

China

Uzbek

istan

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

Average=-0.25839

Okun’s Law Coefficients: All Countries(based on “level (HP100)” specification)

Spain

Slovak

Rep

ublic

Finlan

d

Netherl

ands

Belgium

Denmark

France

United

King

dom

Portug

al

Bosnia

and H

erzeg

ovina

Switzerl

and

Korea

Pakist

an

Costa

Rica

Mold

ova

Hong K

ong S

AR

Mex

ico

Philipp

ines

Peru

Argen

tina

Hondu

ras

Seych

elles

Roman

ia

Azerb

aijan

Kyrgy

z Rep

ublic

Singap

ore

El Salv

ador

-1-0.8-0.6-0.4-0.2

00.20.4

Average=-0.23952

Country Groups

Total: 81 Countries• 24 Advanced Economies

• 20 Emerging Market Economies• 11 Frontier Market Economies

• 26 Other Developing Economies

Spa

inA

ustr

alia

Uni

ted

Sta

tes

Can

ada

Irel

and

Fin

land

Sw

eden

Uni

ted

Kin

gdom

Den

mar

kF

ranc

eG

reec

eN

ethe

rlan

dsP

ortu

gal

New

Zea

land

Isra

elG

erm

any

Bel

gium

Sw

itze

rlan

dN

orw

ayH

ong

Kon

g S

AR

Aus

tria

Ital

yJa

pan

Sin

gapo

re

-1

-0.8

-0.6

-0.4

-0.2

0

Average=-0.3032

Okun’s Law Coefficients: Advanced Economies

(based on “change” specification)

Notes: Ball and others (2013) do not cover Greece, Israel, Hong Kong SAR, and Singapore. These countries are marked with green.

Okun’s Law Coefficients: Advanced Economies(based on “level (HP100)” specification)

Notes: Ball and others (2013) do not cover Greece, Israel, Hong Kong SAR, and Singapore. These countries are marked with green.

Spain

United

Stat

es

Nether

lands

Sweden

Greec

e

Denm

ark

Franc

e

United

Kin

gdom

Israe

l

Norway

Italy

Austri

a-1

-0.8-0.6-0.4-0.2

0

Average=-0.37687

Okun’s Law Coefficients: Emerging Market Economies


Colom

biaChi

le

Polan

dEgy

pt

Hunga

ry

Czech

Rep

ublic

South

Afri

ca

Brazil

Philip

pine

s

Mex

icoKor

ea

Russia

Taiwan

Pro

vinc

e of C

hina

Turke

yPer

u

Thaila

nd

Mala

ysia

Indo

nesia

Mor

occo

China

-0.8

-0.6

-0.4

-0.2

0

Average=-0.23075

Okun’s Law Coefficients: Emerging Market Economies

(based on “level (HP100)” specification)

Colom

biaChi

le

Polan

dEgy

pt

Hunga

ry

South

Afri

ca

Czech

Rep

ublic

Korea

Taiwan

Pro

vinc

e of C

hina

Brazil

Mex

ico

Philip

pine

s

Russia Per

u

Thaila

nd

Turke

y

Mala

ysia

China

Mor

occo

Indo

nesia

-0.8

-0.6

-0.4

-0.2

0

Average=-0.23154

Okun’s Law Coefficients: Frontier Market Economies


Tunisi

a

Lithua

nia

Vietna

m

Bulga

ria

Argen

tina

Croati

a

Jord

an

Kazak

hstan

Pakist

an

Roman

ia

Ukrain

e-0.5

-0.4

-0.3

-0.2

-0.1

0

Average=-0.19679

Okun’s Law Coefficients: Frontier Market Economies


Lithua

nia

Tunisi

a

Croati

a

Vietna

m

Pakist

an

Bulga

ria

Jord

an

Argen

tina

Kazak

hstan

Roman

ia

Ukrain

e-0.6-0.5-0.4-0.3-0.2-0.1

0

Average=-0.21871

Okun’s Law Coefficients: Other Developing Economies


Slova

k Rep

ublic Ira

n

Urugu

ay

Costa

Rica

Georg

ia

Nicara

gua

Kyrgy

z Rep

ublic

Alger

ia

Belaru

s

Domin

ican

Repub

lic

Azerb

aijan

El Salv

ador

Sudan

-0.5-0.4-0.3-0.2-0.1

00.1

Average=-0.13956

Okun’s Law Coefficients: Other Developing Economies


Slova

k Rep

ublic

Urugu

ay

Venez

uela

Alban

ia

Mol

dova

Domin

ican

Repub

lic

Hondu

ras

Seych

elles

Georg

ia

Azerb

aijan

Sudan

Uzbek

istan

Serbi

a-0.6

-0.4

-0.2

0

0.2

Average=-0.12769

Okun’s Law Coefficients: Summary(group average)

All Economies(81)

Advanced Economies

(24)

Emerging Markets(20)

Other Developing Economies

(26)

Frontier Market Economies

(11)

-0.4

-0.3

-0.2

-0.1

0

Change Specification Level Specification ( HP 100 ) Level Specification ( HP 12 )

Distribution of Okun’s Law Coefficients:(in percent, based on “levels” specification)

<-0.8 (-0.8, -0.6) (-0.6, -0.4) (-0.4, -0.2) (-0.2, 0) (0, 0.2) (0.2, 0.4)0

102030405060

OECD Countries (30)

<-0.8 (-0.8, -0.6) (-0.6, -0.4) (-0.4, -0.2) (-0.2, 0) (0, 0.2) (0.2, 0.4)0

102030405060

Non-OECD Countries (51)

Distribution of Okun’s Law R-sq:(in percent, based on “levels” specification)

<0.2 (0.2, 0.4) (0.4, 0.6) (0.6, 0.8) >0.80

20

40

60OECD Countries (30)

<0.2 (0.2, 0.4) (0.4, 0.6) (0.6, 0.8) >0.80

20

40

60Non-OECD Countries (51)

Okun's Law Coefficients: Regional Country Groups

Based on "level" Based on "change"

mean median mean median

South Asia, East Asia, and the Pacific -0.166 -0.161 -0.138 -0.108

Americas -0.239 -0.215 -0.224 -0.214

Europe -0.362 -0.367 -0.289 -0.282

Middle East and North Africa -0.154 -0.184 -0.173 -0.145

Emerging Europe and CIS -0.187 -0.136 -0.188 -0.152

Sub-Saharan Africa -0.178 -0.163 -0.170 -0.145

Other Robustness Checks

Panel A. HP 12 Panel B. SURE

Panel C. Innovation Panel D. IV

0.5

11.5

22.5

De

nsity

-.6 -.4 -.2 0 .2HP12

0.5

11.5

22.5

De

nsity

-.8 -.6 -.4 -.2 0 .2sure

0.5

11.5

22.5

De

nsity

-.8 -.6 -.4 -.2 0 .2bq

0.5

11.5

2D

ensity

-1 -.5 0iv

Determinants of Okun’s Law coefficient(OECD and Non-OECD)

0 10 20 30 40-1

-0.8-0.6-0.4-0.2

00.20.4

Average Unemployment Rate

Average Unemployment Rate

Oku

n’s

Law

Coe

ffici

ent

0 25 50 75-1

-0.8-0.6-0.4-0.2

00.20.4

Informality

Informality

Oku

n’s

Law

Coe

ffici

ent

0 3 6 9 12-1

-0.8-0.6-0.4-0.2

00.2

Labor Market Flexibility

Labor Market Flexibility

Oku

n’s

Law

Coe

ffici

ent

0 3 6 9 12-1

-0.8-0.6-0.4-0.2

00.2

Product Market Flexibility

Product Market Flexibility

Oku

n’s

Law

Coe

ffici

ent

Determinants of Okun's Law Coefficients (OECD and Non-OECD) (1) (2) (3) (4) (5)Average Unemployment -0.009*** -0.017*** -0.014*** [-3.466] [-4.723] [-3.785] Informality 0.003*** 0.003*** 0.004*** [4.162] [5.254] [5.705] Services (% of GDP) -0.003*** 0.000 [-6.953] [-0.015] Constant 0.034*** -0.235*** 0.117*** -0.157*** -0.195*** [2.897] [-7.991] [6.589] [-5.066] [-3.058] N 102 92 96 92 87R2 0.107 0.161 0.34 0.329 0.355 Note: t-statistics are in parenthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.

Determinants of Okun's Law Coefficients (OECD and Non-OECD) (1) (2) (3)Average Unemployment -0.017*** -0.019*** -0.020*** [-4.072] [-4.569] [-4.763] Informality 0.004*** 0.002*** 0.002*** [5.468] [2.786] [3.062] Services (% of GDP) 0.001 0.001 0.002 [0.946] [1.116] [1.660] Labor Market Flexibility -0.015** -0.012* [-2.298] [-1.735] Product Market Flexibility -0.036*** -0.029** [-3.110] [-2.369] Constant -0.151** -0.014 -0.019 [-2.089] [-0.155] [-0.204] N 74 71 69R2 0.412 0.467 0.488 Note: t-statistics are in parenthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.

Data QualityRelevance

What we’ve done thus far:

1. Looked more intensively at Latin American countries, for which we had a better data set

2. Re-done analysis using employment (rather than unemployment) – this work is preliminary

New Data Set on Unemployment for Latin America and the Caribbean

Laurence Ball, Nicolás De Roux and Marc Hofstetter, Unemployment in Latin America and the Caribbean, IMF WP 11/252, 2011

• “A major reason that Latin American unemployment is understudied is lack of data. Unemployment statistics are fragmentary, and there are big differences in how unemployment is measured across countries and over time. Therefore, a major part of our project involves data gathering.”

• Ball et al compile a data set for 19 countries that covers far more years than the commonly-used IADB data.

– “To derive our data, we have gone country by country to figure out how unemployment was measured in different periods. We have made judgments about which changes in methodology are small enough to ignore, and how to adjust for larger changes. In some cases we can splice different unemployment series together using periods in which they overlap. When in doubt, we have sought advice from people at the agencies that produce unemployment data. “

1979

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u_ch

g

-10 -5 0 5 10y_chg

1979-2011 (33 obs) slope: -0.22 (se = 0.05)Adjusted R-squared = 0.36 RMSE = 1.72

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ur_s

tar1

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ur_s

tar1

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-15 -10 -5 0 5y_star12


Argentina

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chg

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Brazil

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chg

-15 -10 -5 0 5 10y_chg


19781979

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19901991

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Mexico

Based on y_chg

β Obs Adjusted

R² RMSE

Argentina -0.221*** (0.0524) 32 0.352 1.751

Brazil -0.215*** (0.0438) 29 0.452 0.685

Chile -0.580*** (0.0840) 32 0.601 2.177

Colombia -0.622*** (0.0885) 32 0.609 1.048

Costa Rica -0.221*** (0.0496) 32 0.378 0.960

Ecuador -0.355** (0.152) 21 0.181 1.982

El Salvador 0.000950 (0.116) 23 -0.048 1.254

Honduras 0.0421 (0.115) 21 -0.045 1.313

Jamaica -0.154** (0.0716) 32 0.105 1.109

Mexico -0.207*** (0.0339) 32 0.540 0.690

Nicaragua -0.170* (0.0928) 32 0.070 2.039

Panama -0.204*** (0.0357) 32 0.506 0.975

Peru -0.118*** (0.0382) 32 0.216 1.298

Uruguay -0.279*** (0.0524) 32 0.468 1.332

Venezuela -0.212*** (0.0318) 32 0.584 1.199

Average -0.234 0.331

Okun’s Coefficients for Latin America

Distribution of Employment Responsiveness

Okun’s Law Coefficients:Unemployment Elasticities vs. Employment Elasticities

Determinants of Okun's Law Coefficients (Employment Elasticities) (1) (2) (3) (4) (5)

Average Employment Growth -0.017 -0.036* -0.023 [-0.885] [-1.793] [-1.040] Informality -0.006*** -0.007*** -0.004** [-3.889] [-4.257] [-2.264] Services (% of GDP) 0.006*** 0.005*** [5.164] [2.990] Constant 0.148*** 0.383*** -0.153*** 0.465*** 0.132 [4.172] [5.610] [-2.815] [5.715] [0.966] N 82 72 76 72 67R2 0.01 0.178 0.265 0.214 0.314 Note: t-statistics are in parenthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.

Determinants of Employment Elasticities (Non-OECD) (1) (2) (3)Average Employment Growth -0.026 -0.039 -0.031 [-1.109] [-1.543] [-1.251] Informality -0.004* -0.003 -0.003* [-1.884] [-1.522] [-1.716] Services (% of GDP) 0.008*** 0.004 0.006** [4.173] [1.577] [2.433] Labor Market 0.086** 0.084** [2.644] [2.549] Product Market 0.007 0.009 [0.566] [0.693] Constant -0.625** 0.095 -0.589** [-2.272] [0.653] [-2.094] N 54 54 52R2 0.455 0.349 0.45 Note: t-statistics are in paranthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.

Okun Outside OECDTentative Conclusions

1. Law holds better-than-(we)-expected.

2. Coefficient for non-OECD countries is smaller (around -0.2 on average) than for OECD countries, but there is considerable heterogeneity

3. Variation in Okun’s coefficient can be accounted for partially by country characterics such as degree of informality and product market flexibility

okun talk at new school by prakash loungani

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