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Okun's Law, Dead or Alive: A Fundamental Approach

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  • de la Fonteijne, Marcel R.

Abstract

Okun's Law, which relates changes in output to changes in unemployment has been debated since Okun revealed it in 1962. By introducing a simple but plausible process of hiring and firing workers we will show a fundamental flaw in Okun’s Law. It is interesting to see that this process can generate lookalike plots to empirical quarterly data. Translation of the model to an estimator is comparable with a VAR method with lag 2 and will yield higher accuracy. Okun’s Law is not a suitable tool to estimate unemployment from GDP growth or unemployment change from GDP growth.

Suggested Citation

  • de la Fonteijne, Marcel R., 2014. "Okun's Law, Dead or Alive: A Fundamental Approach," MPRA Paper 83911, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:83911
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    File URL: https://mpra.ub.uni-muenchen.de/83911/1/MPRA_paper_83911.pdf
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    References listed on IDEAS

    as
    1. Brent Meyer & Murat Tasci, 2012. "An unstable Okun’s Law, not the best rule of thumb," Economic Commentary, Federal Reserve Bank of Cleveland, issue June.
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    More about this item

    Keywords

    sustainability; Okun; unemployment estimator; GDP growth; real business cycle;
    All these keywords.

    JEL classification:

    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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