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The Dynamics of Economic Growth and Unemployment in Major European Countries: Analysis of Okun´s Law

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  • Zagler, Martin

Abstract

This paper analyzes a vector error correction model of economic growth and unemployment in four major European economies, France, Germany, Italy, and the UK. We find that unemployment and economic growth are cointegrated, and driven be the same autoregressive unit root present in most endogenous growth models. In the long run, economic growth and unemployment are positively correlated, as suggested by recent economic theories on endogenous growth and unemployment. In the short-run, an increase in the equilibrium unemployment rate is related to a decline in economic growth rates. The short-run dynamics of economic growth and unemployment therefore remain consistent with Okun's law. Okun's coefficient is in line with previous estimates for all countries except for the UK, whose labor market appears much more flexible in accommodating adverse transitory shocks than continental labor markets.

Suggested Citation

  • Zagler, Martin, 2003. "The Dynamics of Economic Growth and Unemployment in Major European Countries: Analysis of Okun´s Law," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(3).
    • Handle: RePEc:eaa:aeinde:v:3:y:2003:i:3_18
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    1. 37. Selected Readings on World Development in journal AEID 2001-2020: Europe and Eurasia
      by MCG Blogs de Economía in Euro-American Association: World Development on 2020-01-16 19:11:00

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    Cited by:

    1. Bibi Rouksar-Dussoyea & Ho Ming-Kang & Raja Rajeswari & Benjamin Chan Yin-Fah, 2017. "Economic Crisis in Europe: Panel Analysis of Inflation, Unemployment and Gross Domestic Product Growth Rates," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(10), pages 145-154, October.
    2. Turan, Güngör, 2015. "Türkiye'de Büyüme ve İşsizlik [Growth and Unemployment in Turkey]," MPRA Paper 77773, University Library of Munich, Germany.
    3. ANDRADE, Carlos & PINHO, Carlos & PINHO, Maria de Fátima, 2010. "Exploring Regional Convergence: Evidence From 19 European Countries, 1991-2008," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(2).
    4. Nurudeen Abu, 2017. "Does Okun’s Law Exist in Nigeria? Evidence from the ARDL Bounds Testing Approach," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 11(2), June.
    5. Despina Tumanoska, 2019. "The Validity of Okun¡¯s Law in North Macedonia," Business and Economic Research, Macrothink Institute, vol. 9(2), pages 160-168, June.

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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