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A High-Resolution Lead-Lag Analysis of US GDP, Employment, and Unemployment 1977–2021: Okun’s Law and the Puzzle of Jobless Recovery

Author

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  • Knut Lehre Seip

    (Faculty of Technology Arts and Design, Oslo Metropolitan University, P.O. Box 4 St. Olavs Plass, Pilestredet Park 33, 0176 Oslo, Norway)

  • Dan Zhang

    (Faculty of Social Sciences, Oslo Business School, Finance and Accounting, Oslo Metropolitan University, P.O. Box 4 St. Olavs Plass, Pilestredet Park 33, 0176 Oslo, Norway)

Abstract

Okun’s law is formulated as the ratio between GDP and unemployment (UE): β = f(GDP/UE). It is used to investigate the relations between output and labor input across regions or across business cycles. Based on results by James D. Hamilton we replaced the United States UE with employment (EM) for the years 1977 to 2021 and examined how employment changed relative to output during recessions and recoveries. We found that (i) EM was leading GDP before and lagging GDP after all recessions, except the 2020 recession. (ii) The β E (9) = GDP/EM for rolling ordinary linear regression over 9 months decreases just after a recession and then recovers over 2- to 4-year periods. (iii) The two series showing that EM → GDP and β E (9) < 0.5 coincided in the 34 months that partly preceded and partly followed five of six NBER recession dates, providing a probability of ≈0.0002 to coincide with the recessions by chance. Thus, the two series may be used to support forecasts of coming recessions. Since EM precedes GDP and labor productivity declines before recessions, a policy recommendation for avoiding “jobless recovery” is that employment should not increase more rapidly than the real economy.

Suggested Citation

  • Knut Lehre Seip & Dan Zhang, 2022. "A High-Resolution Lead-Lag Analysis of US GDP, Employment, and Unemployment 1977–2021: Okun’s Law and the Puzzle of Jobless Recovery," Economies, MDPI, vol. 10(10), pages 1-16, October.
    • Handle: RePEc:gam:jecomi:v:10:y:2022:i:10:p:260-:d:948745
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    References listed on IDEAS

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    3. Ziegenbein, Alexander, 2021. "Macroeconomic shocks and Okun’s Law," Economics Letters, Elsevier, vol. 202(C).
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    5. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, January.
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