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Economic Growth and Regional Labor Market Development in German Regions: Okun’s Law in a Spatial Context

Author

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  • Oberst, Christian

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Oelgemöller, Jens

    (Institute for Spatial and Housing Economics)

Abstract

The inverse relationship between economic growth and labor market developments in the form of changes in the unemployment rate is known in economic literature as Okun’s law. The objectives of this paper are to estimate a regionalized Okun coefficient and its associated (regional) unemployment thresholds. The suitability and limitations of Okun’s law as a rule of thumb for regional economic growth and labor market policy are also discussed. Motivated by “Germany’s Jobs Miracle” in face of the economic crisis of 2008 and 2009, the existence of an uncoupling effect between economic and unemployment growth is questioned and whether regional economic growth is a driving force for regional labor market development. A regional dataset for the years 2002 to 2009 is employed for this study. The spatial dimension is pursued in two ways: a non-parametric approach using functionally defined labor markets as study areas and the application of spatial econometric panel data models, in particular the Spatial Durbin Error Model. The rationale is that functionally defined regional study areas are the appropriate spatial reference level for the analysis. It is found that, without accounting for spatial dependence, regionalized Okun coefficients are likely to be overestimated. The empirical results confirm a positive impact of economic growth on labor market performance; however, the estimated effect of regional economic growth is far lower than would have been expected. The paper illustrates the limited transferability of Okun’s law as a rule of thumb for growth dynamics on a regional level as well as limitations of regional growth dynamics for regional labor market development.

Suggested Citation

  • Oberst, Christian & Oelgemöller, Jens, 2013. "Economic Growth and Regional Labor Market Development in German Regions: Okun’s Law in a Spatial Context," FCN Working Papers 5/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2013_005
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    Cited by:

    1. KARGI, Bilal, 2014. "Okun’s Law and Long Term Co-Integration Analysis for OECD Countries (1987-2012)," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 119, pages 77-85.
    2. Camilo Alberto Cárdenas Hurtado & María Alejandra Hernández Montes & Jhon Edwar Torres Gorron, 2015. "A Statistical Analysis of Heterogeneity on Labour Markets and Unemployment Rates in Colombia," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, August.
    3. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    4. Rui Pereira, 2014. "Okun’s law, asymmetries and regional spillovers: evidence from Virginia metropolitan statistical areas and the District of Columbia," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 52(2), pages 583-595, March.
    5. Celia Melguizo, 2017. "An analysis of Okun’s law for the Spanish provinces," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 37(1), pages 59-90, February.
    6. Rodrigo Melo Gois & Marco Antonio Jorge, 2017. "Investigating the Okun’s Law in Brazil and three of its Metropolitan Areas," Revista de Economia Mackenzie (REM), Mackenzie Presbyterian University, Social and Applied Sciences Center, vol. 14(1), pages 24-58, January-J.
    7. Vakulenko, Elena, 2015. "Analysis of the relationship between regional labour markets in Russia using Okun’s model," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 40(4), pages 28-48.
    8. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    9. Camilo Alberto Cárdenas Hurtado & María Alejandra Hernández Montes & Jhon Edwar Torres Gorron, 2014. "An Exploratory Analysis of Heterogeneity on Regional Labour Markets and Unemployment Rates in Colombia: An MFACT approach," Borradores de Economia 802, Banco de la Republica de Colombia.
    10. Albers, Scott, 2013. "Okun’s Law as a Pi-to-1 ratio: A harmonic / trigonometric theory as to why Okun’s Law works," MPRA Paper 46633, University Library of Munich, Germany.
    11. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    12. Höwer, Daniel & Oberst, Christian A. & Madlener, Reinhard, 2017. "Regionalization Heuristic to Map Spatial Heterogeneity of Macroeconomic Impacts: The Case of the Green Energy Transition in NRW," FCN Working Papers 13/2017, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised 01 Feb 2019.

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    More about this item

    Keywords

    Okun’s Law; Spatial Econometrics; Regional Labor Markets; Regional Growth;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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