Revisiting Okun's Relationship

33 Pages Posted: 21 Mar 2016

See all articles by Robert John Dixon

Robert John Dixon

University of Melbourne - Department of Economics

Guay C. Lim

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Jan C. van Ours

Tilburg University - Department of Economics; University of Melbourne - Department of Economics

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Abstract

Our paper revisits Okun's relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985-2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers, it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate, it will also have the distributional effect of lowering youth unemployment.

Keywords: Okun's law, unemployment, equilibrium unemployment rates

JEL Classification: J64

Suggested Citation

Dixon, Robert John and Lim, Guay C. and van Ours, Jan C., Revisiting Okun's Relationship. IZA Discussion Paper No. 9815. Available at SSRN: https://ssrn.com/abstract=2750298

Robert John Dixon (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, VIC 3010
Australia
61 (0)3 83445352 (Phone)
61 (0)3 83446899 (Fax)

Guay C. Lim

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
161 Barry Street
Carlton, VIC 3053
Australia

Jan C. Van Ours

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2880 (Phone)
+31 13 466 3042 (Fax)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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