Asymmetric Unemployment-Output Tradeoff in the Eurozone

Abstract

This study investigates the asymmetric unemployment-output tradeoff in the Eurozone.Building upon the augmented Okun's law framework, the relationships between unemployment and output cannot be correctly specified in the static linear, static asymmetric and dynamic linear regressions. By contrast, the nonlinear autoregressive distributed lag (NARDL) model is well-specified and in this case indicates that the nature of Okun's law is asymmetric.For the Eurozone, the NARDL estimates demonstrate that labour markets quickly respond to cyclical outputs in a short period, while the adjustments towards new equilibrium become weak in the long run. Furthermore, the cross-sectional analysis of long run asymmetries indicates that government spending and trade balance are key factors affecting the asymmetric unemployment-output tradeoff. Thus, these results seem to suggest that, in spite of the fact that member states lack monetary sovereignty, flexible application of fiscal reforms or labour market reforms could help to reduce asymmetric effects. JEL Codes: C22, E32, J64.Keywords: unemployment-output tradeoff, nonlinear autoregressive distributed lag (NARDL), asymmetry determinants. * We thank Matthew Greenwood-Nimmo and Hanan Naser for their insightful comments on a previous version. The remaining errors are our own.

Is there a Trade-off between Output and Unemployment? An Evidence from Okun’s Law for G-20 Countries

“…The empirical predictions about Okun's Law are considered both national (OECD countries, Asian-Pacific countries, G7 countries and some additional countries to G7 countries) and regional (Spainish regions, Canadian provinces, US's regions, Greek Regions, Finnish Regions, Czech and Slovak regions). The empirical study examples for country comparisons are; Lee (2000), Viren (2001), Pierdzioch et al(2011), Rülke (2012, Kim et al (2014), Ball et al(2015), Guisinger & Siclair (2015), Bhattarai (2016) and Tang & Bethencourt (2017). Lee (2000) evaluated the robustness of the Okun's Law for OECD countries.…”