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Unboxing Okun’s Relation Between Economic Growth and Unemployment Rate: Evidence from the United States, 1948–2024

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  • Óscar Peláez-Herreros

    (Department of Economics, El Colegio de la Frontera Norte, Tijuana 22560, Baja California, Mexico)

Abstract

We develop the first disaggregation of Okun’s law that quantifies all of the information that is subsumed within its coefficients. The proposed method decomposes the coefficients into the sum of the direct effect of the change in output upon the unemployment rate, plus the indirect effects of the variations in the output per hour worked, the hours worked per employed person, the participation rate, and the size of the working-age population. With quarterly data for the United States from 1948 to 2024, we found that the value of the intercept in Okun’s relation is determined by the increases in working-age population and output per hour of work, along with the decrease in the number of hours worked per employed person, plus the growth of the participation rate until the 1990s and its subsequent decline. For its part, the slope, that is, the value of Okun’s coefficient, depends mainly upon the variations in output per hour of work and the hours per employed person. The other factors were scarcely relevant. Changes in these components caused the Okun’s relation to vary over time, showing a greater sensitivity of the unemployment rate to variations in production since the 2008 crisis.

Suggested Citation

  • Óscar Peláez-Herreros, 2025. "Unboxing Okun’s Relation Between Economic Growth and Unemployment Rate: Evidence from the United States, 1948–2024," Economies, MDPI, vol. 13(3), pages 1-21, February.
    • Handle: RePEc:gam:jecomi:v:13:y:2025:i:3:p:59-:d:1595686
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    References listed on IDEAS

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    1. Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
    2. Fontanari, Claudia & Palumbo, Antonella & Salvatori, Chiara, 2022. "The updated Okun method for estimation of potential output with alternative measures of labor underutilization," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 158-178.
    3. Karlsson, Sune & Österholm, Pär, 2020. "A hybrid time-varying parameter Bayesian VAR analysis of Okun’s law in the United States," Economics Letters, Elsevier, vol. 197(C).
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