Okun´s Law over the Business Cycle: Does it Change in the EU Countries after the Financial Crisis?

Abstract

The relationship between economic growth and unemployment is well known. The growth of gross domestic product leads to a fall in unemployment and, reversely, its fall is associated with a rise in unemployment. The paper deals with the estimation of Okun's coefficient for EU28 countries between years 2001 and 2014. Additionally, two sub-periods are also analysed. These represent the pre-crisis period 2001-2007 and the post-crisis period 2008-2014. The result shows higher Okun's coefficient in the post-crisis period. Unemployment in that period responded to changes in gross domestic product more sensitively than in the pre-crisis period. As a result, in order to decrease unemployment, lower economic growth was necessary in the post-crisis period compared to the pre-crisis one.

The Output Gap and Youth Unemployment: An Analysis Based on Okun’s Law

“…The estimated Okun's coefficients (Tables 3 and 4) support the idea of nonlinearity in Okun's law (Tang and Bethencourt 2017). Virén (2001) for OECD countries, Cuaresma (2003) and Knotek (2007) for the US economy, and Novák and Darmo (2019) for EU28 estimated that total unemployment reaction to output volatility is significantly higher in recessions than in expansions. Our estimates (Tables 3 and 4) mostly support this conclusion for youth unemployment of both genders, only with some exceptions.…”

“…Only in a few countries and only for female unemployment did we notice a higher impact of the positive gap rather than the negative one. However, only point estimates support the conclusion presented by Tang and Bethencourt (2017), Virén (2001), Cuaresma (2003), Knotek (2007), and Novák and Darmo (2019), that unemployment is more sensitive to economic recessions than expansions. The cases where coefficients of both gaps are within the same confidence interval (see Appendix B) do not allow to conclude with confidence that the reaction of the unemployment rate to economic upturns and downswings is significantly different.…”

“…In opposite situation, reaction is not so quick. After the recession, firms have aimed to satisfy a growing demand by increasing labour productivity rather than hiring new employees (Novák and Darmo 2019). Wage flexibility is another important factor.…”

“…Also, contrary to the above-mentioned studies which assume that the output gap has a homogenous effect on unemployment, we allow different effects to occur depending on the gap's sign (positive/negative). We can find in the literature empirical support that total unemployment sensitivity to output is higher in recessions than in expansions (see Tang and Bethencourt (2017), Novák and Darmo (2019) for a literature review), but there is a lack of evidence whether this pattern holds for ageand gender-specific unemployment rates. Here, our research is close to Ahn et al (2019), but with the focus on the unemployment rate, instead of its fluctuation from the equilibrium level, and it's reaction to the changes in positive and negative output gap.…”

Okun's law and assessment of stimulus to the economy of Bosnia and Herzegovina

“…On the other side, in times of economic expansion firm owners prefer to increase overtime working hours than to increase employment (Lim, et al, 2018). A country-level analysis for EU28 also indicates similar results, higher Okun coefficient values have been observed in the post-crisis period of 2008-2014 than in pre crises period of 2001-2007 in EU28 countries (Novak & Darmo, 2019).…”