Disaggregating Okun's Law: Decomposing the Impact of the Expenditure Components of GDP on Euro Area Unemployment

26 Pages Posted: 15 Dec 2014

See all articles by Robert Anderton

Robert Anderton

European Central Bank (ECB)

Ted Aranki

European Central Bank (ECB)

Boele Bonthuis

University of Amsterdam; Deutsche Bundesbank

Valerie Jarvis

European Central Bank (ECB)

Date Written: December 3, 2014

Abstract

This paper examines the usefulness of the Okun relationship as a “rule of thumb” for predicting changes in unemployment, as a result of changes in output. It argues that a disaggregated version of the Okun relationship - making use of the differential reaction of unemployment to changes in the various expenditure components of GDP - significantly enhances the capacity of the Okun relationship (in comparison to the aggregate “rule of thumb”) for predicting movements in unemployment. The paper tests this hypothesis using a dataset for the 17 euro area countries over the period 1996Q1-2013Q4. The results suggest that euro area unemployment is particularly sensitive to movements in the consumption component of GDP, while movements in foreign trade (exports and imports) have a much lower impact on unemployment developments. This reflects the highly labour-intensive nature of the services that represent the bulk of consumers’ expenditure, while the higher productivity manufacturing-related content of exports tends to be less labour intensive.

Keywords: Okun relationship, unemployment, expenditure components of GDP, panel econometrics

JEL Classification: E2, E24, C23

Suggested Citation

Anderton, Robert and Aranki, Ted and Bonthuis, Boele and Jarvis, Valerie, Disaggregating Okun's Law: Decomposing the Impact of the Expenditure Components of GDP on Euro Area Unemployment (December 3, 2014). ECB Working Paper No. 1747. Available at SSRN: https://ssrn.com/abstract=2533387

Robert Anderton (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Ted Aranki

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Boele Bonthuis

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Valerie Jarvis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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