A State-Level Analysis of Okun's Law

43 Pages Posted: 22 Oct 2015

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: 2015-10-21

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. In this paper, we estimate Okun's coefficients for each U.S. state and examine the potential factors that explain the heterogeneity of the estimated Okun relationships. We 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 nonmanufacturing employment) are important determinants of the differences in Okun's coefficient across states. Finally, we show that Okun's relationship is not stable across specifications, which can lead to inaccurate estimates of the potential determinants of Okun's coefficient.

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 (2015-10-21). FRB of Cleveland Working Paper No. 1523, Available at SSRN: https://ssrn.com/abstract=2677547

Amy Guisinger (Contact Author)

George Washington University

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Ruben Hernandez-Murillo

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