Short and Long-Run Effects of Productivity on Unemployment
30 Pages Posted: 30 Jan 2017
Date Written: January 28, 2017
Okun’s (1962) seminal paper is an important study on economic growth and unemployment but a detailed exploration of the effect of productivity growth on unemployment has been left aside. Yet, the relationship between productivity growth and unemployment has been debated since long. In this paper we present stylized facts on the link between productivity growth and unemployment for the short and long run, and present model variants that demonstrate that in the short run productivity growth can have a negative effect on employment – or may even increase unemployment – while in the long run the relationship between productivity growth and employment are likely to co-vary positively. Using US data, empirically we decompose the time series of unemployment rate and productivity growth into long run and short run components and show empirical evidence that the long run and short run components co-vary as predicted by some theories.
Keywords: Okun's law, Productivity, Unemployment
JEL Classification: O11, O25, O33
Suggested Citation: Suggested Citation