A State-Level Analysis of Okun's Law

37 Pages Posted: 6 Oct 2015 Last revised: 3 Jan 2019

See all articles by Amy Guisinger

Amy Guisinger

George Washington University

Ruben Hernandez-Murillo

KeyBank

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Tara M. Sinclair

George Washington University - Department of Economics; George Washington University - Elliott School of International Affairs (ESIA); George Washington University - Institute For International Economic Policy (GWIIEP); George Washington University - Research Program on Forecasting; George Washington University - George Washington Institute of Public Policy (GWIPP); Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA); Halle Institute for Economic Research

Date Written: September, 2015

Abstract

Okun's law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential. This relationship is often referred to by policy makers and used by forecasters. In this paper, we estimate Okun's coefficients separately for each U.S. state using an unobserved components framework and find variation of the coefficients across states. We exploit this heterogeneity of Okun's coefficients to directly examine the potential factors that shape Okun's law, and find that indicators of more flexible labor markets (higher levels of education achievement in the population, lower rate of unionization, and a higher share of non-manufacturing employment) are important determinants of the differences in Okun's coefficient across states.

Keywords: Correlated unobserved components, potential output, natural rate of unemployment

JEL Classification: C32, E32, R11

Suggested Citation

Guisinger, Amy and Hernandez-Murillo, Ruben and Owyang, Michael T. and Sinclair, Tara M., A State-Level Analysis of Okun's Law (September, 2015). FRB St. Louis Working Paper No. 2015-29, Available at SSRN: https://ssrn.com/abstract=2669861 or http://dx.doi.org/10.20955/wp.2015.029

Amy Guisinger (Contact Author)

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Ruben Hernandez-Murillo

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