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Okun talk at new school by Prakash Loungani

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Okun's Law

Okun's Law

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  • 1. Does One Law Fit All? Cross-Country Evidence on Okun’s Law 1 Laurence Ball (Johns Hopkins University) Davide Furceri (IMF) Daniel Leigh (IMF) Prakash Loungani (IMF) September 10, 2013
  • 2. Outline of Talk 1. Evidence for 20 OECD countries – Review of “Okun’s Law: Fit at 50?” (Ball, Leigh and Loungani, 2013) – New Evidence on “A Law for the Ages? Okun’s Law by Age Group” 2. Okun Outside OECD – Comparison of Estimates for OECD and non-OECD countries – Determinants of the Okun Coefficient 3. Addressing Issues of Data Quality and Relevance of Unemployment-Based Okun’s Law – Data Quality: Closer Look at Evidence for Latin America – Relevance: Preliminary Work using Employment
  • 3. Okun’s Law 101 • Okun (1962) • “Levels” version: Ut – Ut * = β (Yt – Yt *) + εt, β < 0, • “Changes” version: ΔUt = α + β ΔYt + ωt • Textbooks say U.S. coefficient β = –0.5. 3
  • 4. Accusations Against Okun’s Law • It’s unstable • “An Unstable Okun’s Law, Not the Best Rule of Thumb” (Meyer and Tasci, St. Louis Fed, 2012) • It’s dead • “The Demise of Okun’s Law” (Robert Gordon, 2011) • Recoveries have become “jobless” • It broke down during Great Recession • April 2010 WEO (“Okun’s Law and Beyond”) 4
  • 5. Reasons to care about Okun’s Law • Along with other indicators, it helps us assess whether an increase in unemployment is cyclical or structural • If short-run decreases in output are due to declines in aggregate demand, it tells us monetary and fiscal policies may be important in solving ‘the unemployment problem’ • It suggests need for a two-handed approach to solving unemployment (both aggregate demand and aggregate supply matter) • Statistical check on the quality of GDP and labor market data
  • 6. • Initial increase cyclical rather than structural • Greater uncertainty about relative proportions now, but signs that cyclical component remains important in most countries • Beveridge curve quite stable; moreover shifts may not be sign of increase in natural rate (Diamond 2013) • Other measures of mismatch back to normal • Lack of deflation not a sign of small unemployment gap • Stability of Okun’s Law suggests jobs will return if the growth returns. Unemployment during the Great Recession 6
  • 7. Debate in the Blogosphere: Krugman vs. Kocherlakota “Why is unemployment remaining high? Because growth is weak — period, full stop, end of story. Historically, low or negative growth has meant rising unemployment, fast growth falling unemployment (Okun’s Law) … what we’ve been seeing lately is well within the normal range of noise.” Paul Krugman, July 9, 2011 • Minneapolis Fed president sees mismatch driving unemployment rate Minneapolis Post Sep. 10, 2010 • A mismatch of worker skills, the location of available jobs and a less mobile workforce has added 2.5 points to the nation’s unemployment rate.
  • 8. Present Debate: Kocherlakota vs. Kocherlakota • A Federal Reserve Governor Announced A Surprising Change- Of-Mind About How He Sees The Economy, Business Insider, Sep. 20, 2012 • Kocherlakota … used to be something of a hawk, arguing that the Fed couldn't do much about unemployment, because the unemployment crisis was "structural" not "cyclical." • Minneapolis Fed president sees mismatch driving unemployment rate Minneapolis Post Sep. 10, 2010 • A mismatch of worker skills, the location of available jobs and a less mobile workforce has added 2.5 points to the nation’s unemployment rate.
  • 9. Debate in the Blogosphere: Krugman vs. McKinsey “There’s no hint in these data that we’ve entered new territory in which decent growth fails to create jobs; the problem is that we haven’t had decent growth.” Paul Krugman, July 9, 2011 “The U.S. jobs challenge today stems from a pattern of jobless recovery that does not conform to the classic cyclical view of recession and recovery. So while healthy GDP growth will be essential [for a return to full employment], it will probably not be sufficient.... it will require major efforts in education, regulation, and even diplomacy.” McKinsey Global Institute, 2011 9
  • 10. A Debate since the 1970s … • “There is sometimes the naïve belief that unemployment must be due to a defect in the labor market, as if the hole in a flat tire must always be at the bottom, because that is where the tire is flat” (Solow, 2000). • "It takes a heap of Harberger triangles to fill an Okun's gap.” (Tobin, 1977) “We impute the higher [European] unemployment to welfare states' diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new information technologies, and a rapidly changing international economy. “ (Ljungqvist and Sargent, 1998)
  • 11. What We Do … and What We Find • We examine fit of Okun’s Law: • In the U.S. since 1948 • In 20 advanced economies since 1980 • What we conclude: • It is a law (at least by the standards of macroeconomics) • Strong and stable in most countries • Exceptions exaggerated and/or quantitatively small BUT: • substantial variation in coefficient across countries » for reasons only partly understood 11
  • 12. Deriving Okun’s Law (1) Et – Et * = γ (Yt – Yt *) + ηt γ > 0 (2) Ut – Ut * = δ (Et – Et *) + μt δ < 0 • We expect γ < 1.5 (labor as quasi-fixed factor) • We expect |δ| <1 (procyclical labor force participation) (3) Ut – Ut * = β (Yt – Yt *) + εt β < 0 • β = γδ, |β|<1.5, and εt = μt + δ ηt. 12
  • 13. Estimating Okun’s Law (3) Ut – Ut * = β (Yt – Yt *) + εt β < 0 • We usually measure Ut * and Yt * with HP filter. • Several tests of robustness • With HP » Alternate values of HP smoothing parameter » Addressing end-point problem • Without HP » Use of forecast errors » Use of CBO measure of Ut * and Yt * » Use of “changes” specification (4) ΔUt = α + β ΔYt + ωt , holds if U* and ΔY * constant. 13
  • 14. U.S. EVIDENCE ON OKUN’S LAW 14
  • 15. Results: U.S. Annual Data 1948-2011 Levels equation: Ut – Ut * = β (Yt – Yt *) + εt , Changes equation: ΔUt = α + β ΔYt + ωt 15 Note: OLS standard errors. ***, **, and *: sig. at the 1, 5, and 10 percent level. λ = 100 λ = 1,000 Changes β -0.411*** -0.383*** -0.405*** (0.024) (0.023) (0.029) α 1.349*** (0.116) Obs 64 64 63 Adjusted R2 0.817 0.813 0.752 Levels
  • 16. Results for U.S., 1948-2011 (SUR, joint estimation of equations 1-3, annual data, λ = 100) 16 Note: Standard errors in parentheses. ***, **, and *: sig. at the 1, 5, and 10 percent level. ` Okun’s Law for Employment Estimate Adjusted R2 γ 0.543*** 0.610 Unemployment-Employment Relation δ -0.728*** 0.798 Okun’s Law for Unemployment β -0.405*** 0.820 Obs p -value for H0: β = γδ 64 0.378
  • 17. Okun’s Law: U.S. Fit (Levels specification, natural rates based on HP filter, annual data) 17 1982 194919581961 19831975 2009 2010 19601995 1962 1993 19631991 20111996 1992 1976 1971 1970 19941959 1997 1954 1964 1974 1950 1981 20032002 1948 1980 1957 1984 1998 19771972 2001 2004 1985 2008 1987 1986 1990 1965 195619992005 1967 1969198820061989 2000 1968 2007 1978 1952 1955 1951 1979 19731966 1953 -2-1 012 Unemploymentgap -6 -4 -2 0 2 4 Output gap = 100 1982 1958 20111961 200920101983 1949 1960 1975 196219911993 1963 1992 1959 1995 1994 1996 1981 1976 1984 1964 1957 1980 1948 19541950 1997 19851971 19702008 1977 1974 1986 198719901956 19981988 2003 1965 2002 1989 1972 2004 2001 19781979 1955 2007 19671999 2005 19522006 1951 1969 19531968 1973 19662000 -2-1 0123 Unemploymentgap -6 -4 -2 0 2 4 Output gap = 1,000
  • 18. Okun’s Law: U.S. Fit (“Changes” specification, annual data) 18 2009 1982 1958 1954 1974 1949 200819801991 1975 1970 2001 2011 2002 1990 2007 1956 1957 1961 2010 1960 1995 1967 1981 2003 20061993 2005 19691979 1987 1971 1992 1986 2004 198919961952 19941988 19852000 1998 1963 1997 1983 1977 1953 19991968 1972 1976 1978 1964 1973 1962 19651966 1959 1984 1955 1951 1950 -2-1 01234 -4 -2 0 2 4 6 8 Change in log of real GDP
  • 19. Okun Stability Test, 1948-2011 (Test for stability of Okun coefficient, β, at unknown date, annual data) 19 Note: F-statistic, inner 70 percent of sample. Critical value from Andrews (2003). 10 percent critical value 02468 1950 1960 1970 1980 1990 2000 2010 = 100 = 1,000 Changes
  • 20. Results for U.S.: Quarterly Data (OLS, levels specification: Ut – Ut * = β(L) (Yt – Yt *) + εt , 1948Q2-2011Q4) 20 Note: Standard errors in parentheses. ***, **, and *: sig. at the 1, 5, and 10 percent level. 1,600 1,600 16,000 16,000 β0 -0.428*** -0.245*** -0.411*** -0.213*** (0.015) (0.0230) (0.013) (0.0286) β1 -0.133*** -0.153*** (0.0345) (0.0447) β2 -0.116*** -0.0794*** (0.0230) (0.0286) β0 + β1 + β2 -0.494*** -0.445*** (0.0126) (0.0119) α Obs 256 256 256 256 Adjusted R2 0.767 0.865 0.795 0.852 Hodrick-Prescott filter λ
  • 21. Replication of Okun (1962) and More (OLS, changes specification: ΔUt = α + β(L) ΔYt + εt) 21 Note: Standard errors in parentheses. ***, **, and *: sig. at the 1, 5, and 10 percent level. Sample Data β0 -0.307*** -0.233*** -0.286*** -0.218*** (0.036) (0.0303) (0.018) (0.0160) β1 -0.168*** -0.137*** (0.0327) (0.0168) β2 -0.0394 -0.0767*** (0.0307) (0.0160) β0 + β1 + β2 -0.441*** -0.432*** (0.0380) (0.0200) α 0.305*** 0.424*** 0.244*** 0.359*** (0.061) (0.0524) (0.023) (0.0215) Obs 51 51 255 255 Adjusted R2 0.584 0.758 0.494 0.663 1948Q2-1960Q4 1948Q2-2011Q4 Vintage data Current data
  • 22. Okun’s Law: U.S. Fit, Quarterly Data (Actual and fitted values of unemployment rate, 1948Q2-2011Q4) 22 Note: Fitted value of Ut based estimate of Ut – Ut * = β (Yt – Yt *) + εt with λ = 1,600. 02468 1012 1950 1960 1970 1980 1990 2000 2010 actual fitted
  • 23. Okun’s Law: U.S. Fit, Quarterly Data (Actual and fitted values of unemployment rate gap, 1948Q2-2011Q4) 23 Note: Fitted value of Ut – Ut * based estimate of Ut – Ut * = β (Yt – Yt *) + εt with λ = 1,600. -2-1 0123 1950 1960 1970 1980 1990 2000 2010 actual fitted
  • 24. JOBLESS RECOVERIES? 24
  • 25. Okun’s Law vs. “Jobless Recoveries” • Popular view: • “Output Came Back, Employment Didn’t” (NPR, 2011) • Our view: • Okun’s Law holds (as shown in previous slides) • Confusion because recent output recoveries have been slow. • Point is recognized by some observers » Krugman (2011) » Gali et al. (2012) 25
  • 26. A Recovery that Looks Jobless (U.S. during the Great Recession) 26 Note: HP filter trends through 2007. Assumption: Ut * and ΔYt * constant thereafter. pre-recession trend .85 .9 .95 1 2007 2008 2009 2010 2011 Log of GDP pre-recession normal 468 10 2007 2008 2009 2010 2011 Unemployment Rate
  • 27. A Recovery that Looks Job-full (U.S. During the 1981 Recession) 27 Note: HP filter trends through 1980. Assumption: Ut * and ΔYt * constant thereafter. pre-recession trend .8 .85 .9 .95 1 1980 1981 1982 1983 1984 1985 1986 Log of GDP pre-recession normal 789 10 1980 1981 1982 1983 1984 1985 1986 Unemployment Rate
  • 28. EVIDENCE ON OKUN’S LAW FOR 20 OECD COUNTRIES 28
  • 29. Cross-country Estimates, 1980-2011 (OLS, levels specification: Ut – Ut * = β (Yt – Yt *) + εt , λ = 100, annual data) 29 Note: Standard errors in parentheses. ***, **, and *: sig. at the 1, 5, and 10 percent level. β Obs Adj. R2 β Obs Adj. R2 Australia -0.536*** 32 0.80 Japan -0.152*** 32 0.65 Austria -0.136*** 32 0.21 Netherlands -0.511*** 32 0.62 Belgium -0.511*** 32 0.54 New Zealand -0.341*** 32 0.59 Canada -0.432*** 32 0.81 Norway -0.294*** 32 0.62 Denmark -0.434*** 32 0.72 Portugal -0.268*** 32 0.62 Finland -0.504*** 32 0.77 Spain -0.852*** 32 0.90 France -0.367*** 32 0.68 Sweden -0.524*** 32 0.62 Germany -0.367*** 32 0.51 Switzerland -0.234*** 32 0.44 Ireland -0.406*** 32 0.77 UK -0.343*** 32 0.60 Italy -0.254*** 32 0.29 USA -0.454*** 32 0.82
  • 30. Cross-country Sub-sample Stability (OLS, levels specification, λ = 100, annual data, 1980-2011) 30 Note: Standard errors in parentheses. ***, **, and *: sig. at the 1, 5, and 10 percent level. βpre-95 βpost-95 p -value βpre-95 βpost-95 p -value Australia -0.552*** -0.433*** 0.405 Japan -0.109*** -0.209*** 0.008 Austria -0.134* -0.137** 0.974 Netherlands -0.713*** -0.336*** 0.006 Belgium -0.634*** -0.310** 0.053 New Zealand -0.317*** -0.426*** 0.363 Canada -0.500*** -0.287*** 0.006 Norway -0.319*** -0.247*** 0.410 Denmark -0.490*** -0.369*** 0.205 Portugal -0.221*** -0.463*** 0.007 Finland -0.610*** -0.297*** 0.001 Spain -0.793*** -0.923*** 0.205 France -0.400*** -0.335*** 0.470 Sweden -0.648*** -0.362*** 0.046 Germany -0.427*** -0.270** 0.232 Switzerland -0.211*** -0.274*** 0.516 Ireland -0.462*** -0.382*** 0.359 UK -0.419*** -0.215*** 0.045 Italy -0.142 -0.358*** 0.110 USA -0.447*** -0.464*** 0.829
  • 31. Summary of Cross-country Estimates • Strong relationship in most countries. • Coefficient β falls significantly at 5 percent level in 5 countries, rises significantly in 2. • Average β is –0.43 in first sample, –0.35 in second. • Correlation of countries’ βs across periods = 0.50. 31
  • 32. Okun’s Law and the Great Recession (Peak-to-trough output and unemployment changes) 32 Notes: Similar to Figure 3.1 in April 2010 WEO. ΣΔU and ΣΔY = cumulative peak-trough changes. Adjusted R2 = –0.03. USA GBR AUT BEL DNK FRA DEU ITANLD NOR SWE CHE CAN JPN FIN IRL PRT ESP NZL 02468 U 0 2 4 6 8 10 - Y
  • 33. Okun’s Law and the Great Recession (Peak-to-trough changes, adjustment for recession duration, T) 33 Note: Adjusted R2 = 0.54. USA GBR AUT BEL DNK FRA DEU ITANLD NOR SWE CHE CAN JPN FIN IRL PRT ESP NZL 02468 U 1 2 3 4 T + Y ΔUt = α + β ΔYt ΣΔU = αT + β Σ ΔY
  • 34. Okun’s Law and the Great Recession (Adjustment for recession duration and country-specific Okun coefficients) 34 Note: αi and βi = country-specific Okun coefficients, T = duration. Adjusted R2 = 0.76. USA GBR AUT BEL DNK FRA DEU ITA NLD NOR SWE CHE CAN JPN FIN IRL PRT ESP NZL 02468 U 0 2 4 6 8 i T + i Y
  • 35. SOURCES OF VARIATION IN OKUN’S LAW COEFFICIENTS 35
  • 36. Cross-Country Variables (Okun coefficient vs. candidate variable) 36 Note: Average unemployment rate denotes 1980-2011 mean. OECD overall employment protection index: 1985-2011 mean based on available data. USA GBR AUT BEL DNK FRADEU ITA NLD NOR SW E CHE CAN JPN FIN IRL PRT ESP AUS NZL -.8-.6-.4-.2 0 Okuncoefficient 0 5 10 15 Average unemployment rate USA GBR AUT BEL DNK FRADEU ITA NLD NOR SWE CHE CAN JPN FIN IRL PRT ESP AUS NZL -.8-.6-.4-.2 0 Okuncoefficient 0 1 2 3 4 OECD overall employment protection index
  • 37. Individual Stories • Large coefficient in Spain: temporary labor contracts • Three smallest coefficients: – Japan: lifetime employment tradition – Switzerland: migrant labor – Austria: a puzzle 37
  • 38. Conclusions for OECD Countries • Strong, stable relationship in most countries. – Little evidence of jobless recoveries or breakdown in the Great Recession. • Substantial cross-country variation only partly understood. 38
  • 39. A LAW FOR THE AGES? OKUN’S COEFFICIENT BY AGE GROUP 39
  • 40. Okun’s Law Coefficient: Age Groups (based on “levels” specification) -2.1 -1.8 -1.5 -1.2 -0.9 -0.6 -0.3 -1E-16 Spain France Sweden Belgium Australia NewZealand Finland Denmark Portugal UnitedStates Canada Norway UnitedKingdom Italy Netherlands Germany Switzerland Austria Japan 15-24 -2.1 -1.8 -1.5 -1.2 -0.9 -0.6 -0.3 0 Spain Denmark Sweden NewZealand Finland Australia Switzerland UnitedStates Canada France Belgium Netherlands Norway Germany Portugal UnitedKingdom Japan Austria Italy 25-34
  • 41. Okun’s Law Coefficient: Age Groups (based on “levels” specification) -2.1 -1.8 -1.5 -1.2 -0.9 -0.6 -0.3 0 Spain Denmark Australia UnitedStates Finland NewZealand Sweden Canada Belgium Netherlands UnitedKingdom Germany France Portugal Switzerland Norway Italy Japan Austria 35-44 -2.1 -1.8 -1.5 -1.2 -0.9 -0.6 -0.3 0 Portugal UnitedStates Canada Denmark UnitedKingdom Netherlands Belgium Spain France Japan Norway Switzerland Sweden Finland Austria NewZealand Italy Germany Australia 45-54
  • 42. Okun’s Law Coefficients: Age Groups (based on “levels” specification) -1.2 -0.9 -0.6 -0.3 1.3E-15 0.3 15-24 25-34 35-44 45-54 55-64 Australia Austria Belgium Canada Denmark Finland France Germany Italy Japan Netherlands New Zealand Norway Sweden Switzerland United Kingdom United States
  • 43. OKUN OUTSIDE OECD
  • 44. Growth Strategies vs. Jobs Strategies Quotes from World Bank’s report on “Jobs” (World Development Report 2013) “From a statistical point of view, the relationship between growth and employment (or unemployment) shows substantial variation over time, across countries, and across sectors. In light of this diversity, a given rate of growth does not guarantee a given level of job creation or a given composition of employment.”
  • 45. Growth Strategies vs. Jobs Strategies Quotes from World Bank’s report on “Jobs” (World Development Report 2013) • “These elasticities show great variability over time and space, too, making it difficult to forecast net job creation …” – “in Tanzania growth elasticities of employment declined from 1.04 in the period 1992–96 to 0.27 in the period 2004–08. Similar trends have been reported for Ethiopia, Ghana, and Mozambique.” – “In Latin America, recent estimates show that growth elasticities of employment were much lower during the global financial crisis than in previous crises. In other words, the Great Recession produced comparatively less net employment destruction in that region.”
  • 46. Okun’s Law Coefficients: All Countries (based on “change” specification) -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 Spain Colombia Chile Poland Australia UnitedStates Tunisia Lithuania Canada SlovakRepublic Ireland Egypt Finland Ecuador Sweden UnitedKingdom Iran Denmark France Greece Hungary Netherlands Portugal NewZealand BosniaandHerzegovina Uruguay CzechRepublic SouthAfrica Israel Germany Belgium Vietnam Bulgaria Moldova Argentina CostaRica Switzerland Brazil Venezuela Georgia Philippines Mexico Panama Korea Norway Nicaragua HongKongSAR Croatia Albania KyrgyzRepublic Jordan Armenia Russia TaiwanProvinceofChina Turkey Peru Kazakhstan Austria Thailand Malaysia Italy Pakistan Japan Romania Algeria Seychelles Belarus Indonesia SaudiArabia DominicanRepublic Serbia Morocco Azerbaijan Ukraine Singapore China Myanmar ElSalvador Uzbekistan Sudan Honduras Average=-0.25839
  • 47. Okun’s Law Coefficients: All Countries (based on “level (HP100)” specification) -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 Spain Colombia Australia SlovakRepublic Lithuania UnitedStates Finland Chile Poland Netherlands Ireland Sweden Belgium Greece Canada Denmark NewZealand Tunisia France Egypt Germany UnitedKingdom Hungary SouthAfrica Portugal Israel Croatia BosniaandHerzegovina Uruguay Iran Switzerland CzechRepublic Norway Korea Vietnam Venezuela Pakistan Ecuador Albania CostaRica TaiwanProvinceofChina Brazil Moldova Panama Bulgaria HongKongSAR Italy Jordan Mexico Japan DominicanRepublic Philippines Russia Austria Peru Nicaragua Thailand Argentina Turkey Malaysia Honduras Kazakhstan Algeria Seychelles Belarus Georgia Romania Armenia Ukraine Azerbaijan China Morocco KyrgyzRepublic Indonesia Sudan Singapore Myanmar Uzbekistan ElSalvador Serbia SaudiArabia Average=-0.23952
  • 48. Country Groups Total: 81 Countries • 24 Advanced Economies • 20 Emerging Market Economies • 11 Frontier Market Economies • 26 Other Developing Economies
  • 49. -1 -0.8 -0.6 -0.4 -0.2 0 Spain Australia UnitedStates Canada Ireland Finland Sweden UnitedKingdom Denmark France Greece Netherlands Portugal NewZealand Israel Germany Belgium Switzerland Norway HongKongSAR Austria Italy Japan Singapore Average=-0.3032 Okun’s Law Coefficients: Advanced Economies (based on “change” specification) Notes: Ball and others (2013) do not cover Greece, Israel, Hong Kong SAR, and Singapore. These countries are marked with green.
  • 50. Okun’s Law Coefficients: Advanced Economies (based on “level (HP100)” specification) Notes: Ball and others (2013) do not cover Greece, Israel, Hong Kong SAR, and Singapore. These countries are marked with green. -1 -0.8 -0.6 -0.4 -0.2 0 Spain Australia UnitedStates Finland Netherlands Ireland Sweden Belgium Greece Canada Denmark NewZealand France Germany UnitedKingdom Portugal Israel Switzerland Norway HongKongSAR Italy Japan Austria Singapore Average=-0.37687
  • 51. Okun’s Law Coefficients: Emerging Market Economies (based on “change” specification) -0.8 -0.6 -0.4 -0.2 0 Colombia Chile Poland Egypt Hungary CzechRepublic SouthAfrica Brazil Philippines Mexico Korea Russia TaiwanProvince… Turkey Peru Thailand Malaysia Indonesia Morocco China Average=-0.23075
  • 52. Okun’s Law Coefficients: Emerging Market Economies (based on “level (HP100)” specification) -0.8 -0.6 -0.4 -0.2 0 Colombia Chile Poland Egypt Hungary SouthAfrica CzechRepublic Korea TaiwanProvince… Brazil Mexico Philippines Russia Peru Thailand Turkey Malaysia China Morocco Indonesia Average=-0.23154
  • 53. Okun’s Law Coefficients: Frontier Market Economies (based on “change” specification) -0.5 -0.4 -0.3 -0.2 -0.1 0 Average=-0.19679
  • 54. Okun’s Law Coefficients: Frontier Market Economies (based on “level (HP100)” specification) -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 Average=-0.21871
  • 55. Okun’s Law Coefficients: Other Developing Economies (based on “change” specification) -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 SlovakRepublic Ecuador Iran Bosniaand… Uruguay Moldova CostaRica Venezuela Georgia Panama Nicaragua Albania KyrgyzRepublic Armenia Algeria Seychelles Belarus SaudiArabia Dominican… Serbia Azerbaijan Myanmar ElSalvador Uzbekistan Sudan Honduras Average=-0.13956
  • 56. Okun’s Law Coefficients: Other Developing Economies (based on “level (HP100)” specification) -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 SlovakRepublic Bosniaand… Uruguay Iran Venezuela Ecuador Albania CostaRica Moldova Panama Dominican… Nicaragua Honduras Algeria Seychelles Belarus Georgia Armenia Azerbaijan KyrgyzRepublic Sudan Myanmar Uzbekistan ElSalvador Serbia SaudiArabia Average=-0.12769
  • 57. Okun’s Law Coefficients: Summary (group average) -0.4 -0.3 -0.2 -0.1 0 All Economies (81) Advanced Economies (24) Emerging Markets (20) Other Developing Economies (26) Frontier Market Economies (11) Change Specification Level Specification ( HP 100 ) Level Specification ( HP 12 )
  • 58. Distribution of Okun’s Law Coefficients: (in percent, based on “levels” specification) 0 10 20 30 40 50 60 <-0.8 (-0.8, -0.6) (-0.6, -0.4) (-0.4, -0.2) (-0.2, 0) (0, 0.2) (0.2, 0.4) OECD Countries (30) 0 10 20 30 40 50 60 <-0.8 (-0.8, -0.6) (-0.6, -0.4) (-0.4, -0.2) (-0.2, 0) (0, 0.2) (0.2, 0.4) Non-OECD Countries (51)
  • 59. Distribution of Okun’s Law R-sq: (in percent, based on “levels” specification) 0 20 40 60 <0.2 (0.2, 0.4) (0.4, 0.6) (0.6, 0.8) >0.8 OECD Countries (30) 0 20 40 60 <0.2 (0.2, 0.4) (0.4, 0.6) (0.6, 0.8) >0.8 Non-OECD Countries (51)
  • 60. Okun's Law Coefficients: Regional Country Groups Based on "level" Based on "change" mean median mean median South Asia, East Asia, and the Pacific -0.166 -0.161 -0.138 -0.108 Americas -0.239 -0.215 -0.224 -0.214 Europe -0.362 -0.367 -0.289 -0.282 Middle East and North Africa -0.154 -0.184 -0.173 -0.145 Emerging Europe and CIS -0.187 -0.136 -0.188 -0.152 Sub-Saharan Africa -0.178 -0.163 -0.170 -0.145
  • 61. Other Robustness Checks Panel A. HP 12 Panel B. SURE Panel C. Innovation Panel D. IV 0 .5 1 1.5 2 2.5 Density -.6 -.4 -.2 0 .2 HP12 0 .5 1 1.5 2 2.5 Density -.8 -.6 -.4 -.2 0 .2 sure 0 .5 1 1.5 2 2.5 Density -.8 -.6 -.4 -.2 0 .2 bq 0 .5 1 1.5 2 Density -1 -.5 0 iv
  • 62. Determinants of Okun’s Law coefficient (OECD and Non-OECD) -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0 10 20 30 40 Okun’sLawCoefficient Average Unemployment Rate Average Unemployment Rate -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0 25 50 75 Okun’sLawCoefficient Informality Informality -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0 3 6 9 12 Okun’sLawCoefficient Labor Market Flexibility Labor Market Flexibility -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0 3 6 9 12 Okun’sLawCoefficient Product Market Flexibility Product Market Flexibility
  • 63. Determinants of Okun's Law Coefficients (OECD and Non-OECD) (1) (2) (3) (4) (5) Average Unemployment -0.009*** -0.017*** -0.014*** [-3.466] [-4.723] [-3.785] Informality 0.003*** 0.003*** 0.004*** [4.162] [5.254] [5.705] Services (% of GDP) -0.003*** 0.000 [-6.953] [-0.015] Constant 0.034*** -0.235*** 0.117*** -0.157*** -0.195*** [2.897] [-7.991] [6.589] [-5.066] [-3.058] N 102 92 96 92 87 R2 0.107 0.161 0.34 0.329 0.355 Note: t-statistics are in parenthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.
  • 64. Determinants of Okun's Law Coefficients (OECD and Non-OECD) (1) (2) (3) Average Unemployment -0.017*** -0.019*** -0.020*** [-4.072] [-4.569] [-4.763] Informality 0.004*** 0.002*** 0.002*** [5.468] [2.786] [3.062] Services (% of GDP) 0.001 0.001 0.002 [0.946] [1.116] [1.660] Labor Market Flexibility -0.015** -0.012* [-2.298] [-1.735] Product Market Flexibility -0.036*** -0.029** [-3.110] [-2.369] Constant -0.151** -0.014 -0.019 [-2.089] [-0.155] [-0.204] N 74 71 69 R2 0.412 0.467 0.488 Note: t-statistics are in parenthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.
  • 65. Data Quality Relevance What we’ve done thus far: 1. Looked more intensively at Latin American countries, for which we had a better data set 2. Re-done analysis using employment (rather than unemployment) – this work is preliminary
  • 66. New Data Set on Unemployment for Latin America and the Caribbean Laurence Ball, Nicolás De Roux and Marc Hofstetter, Unemployment in Latin America and the Caribbean, IMF WP 11/252, 2011 • “A major reason that Latin American unemployment is understudied is lack of data. Unemployment statistics are fragmentary, and there are big differences in how unemployment is measured across countries and over time. Therefore, a major part of our project involves data gathering.” • Ball et al compile a data set for 19 countries that covers far more years than the commonly-used IADB data. – “To derive our data, we have gone country by country to figure out how unemployment was measured in different periods. We have made judgments about which changes in methodology are small enough to ignore, and how to adjust for larger changes. In some cases we can splice different unemployment series together using periods in which they overlap. When in doubt, we have sought advice from people at the agencies that produce unemployment data. “
  • 67. 1979 1980 1981 1982 19831984 1985 1986 19871988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20042005 2006 2007 2008 2009 20102011 -5 05 10 u_chg -10 -5 0 5 10 y_chg 1979-2011 (33 obs) slope: -0.22 (se = 0.05) Adjusted R-squared = 0.36 RMSE = 1.72 1978 19791980 19811982 1983 1984 1985 1986 19871988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20072008 2009 2010 2011 -4-2 0246 ur_star100 -20 -10 0 10 y_star100 1978-2011 (34 obs) slope: -0.11 (se = 0.05) Adjusted R-squared = 0.08 RMSE = 1.95 1978 19791980 19811982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2 024 ur_star12 -15 -10 -5 0 5 y_star12 1978-2011 (34 obs) slope: -0.24 (se = 0.05) Adjusted R-squared = 0.39 RMSE = 1.24 Argentina
  • 68. 1983 1984 1985 1986 19871988 1989 1990 1991 1992 199319941995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2-1 012 u_chg -5 0 5 10 y_chg 1983-2011 (29 obs) slope: -0.21 (se = 0.04) Adjusted R-squared = 0.45 RMSE = 0.68 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2-1 012 ur_star100 -10 -5 0 5 10 y_star100 1982-2011 (30 obs) slope: -0.22 (se = 0.03) Adjusted R-squared = 0.59 RMSE = 0.55 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -1-.5 0 .5 1 1.5 ur_star12 -10 -5 0 5 10 y_star12 1982-2011 (30 obs) slope: -0.20 (se = 0.04) Adjusted R-squared = 0.50 RMSE = 0.47 Brazil
  • 69. 1979 1980 1981 1982 1983 1984 1985 1986 19871988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20052006 2007 2008 2009 2010 2011 -5 05 1015 u_chg -15 -10 -5 0 5 10 y_chg 1979-2011 (33 obs) slope: -0.57 (se = 0.08) Adjusted R-squared = 0.59 RMSE = 2.16 1978 1979 1980 1981 1982 1983 1984 19851986 1987 1988 1989 1990 1991 1992 19931994 1995 1996 19971998 1999 20002001 20022003 2004 2005 2006 2007 2008 2009 20102011 -10 -5 05 10 ur_star100 -10 -5 0 5 10 15 y_star100 1978-2011 (34 obs) slope: -0.47 (se = 0.07) Adjusted R-squared = 0.54 RMSE = 2.00 1978 1979 1980 1981 1982 1983 1984 1985 19861987 1988 1989 19901991 1992 19931994 1995 1996 1997 1998 1999 20002001 20022003 2004 2005 2006 2007 2008 2009 20102011 -10 -5 05 ur_star12 -5 0 5 10 15 y_star12 1978-2011 (34 obs) slope: -0.56 (se = 0.07) Adjusted R-squared = 0.65 RMSE = 1.33 Chile
  • 70. 1979 1980 1981 1982 1983 19841985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20072008 2009 20102011 -2-1 0123 u_chg -10 -5 0 5 10 y_chg 1979-2011 (33 obs) slope: -0.20 (se = 0.03) Adjusted R-squared = 0.55 RMSE = 0.68 1978 1979 1980 1981 1982 1983 1984 1985 1986 19871988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 20012002 2003 2004 2005 200620072008 2009 2010 2011 -2-1 0123 ur_star100 -10 -5 0 5 10 y_star100 1978-2011 (34 obs) slope: -0.17 (se = 0.04) Adjusted R-squared = 0.39 RMSE = 0.77 1978 1979 1980 19811982 1983 1984 1985 1986 19871988 1989 1990 19911992 1993 1994 1995 1996 1997 1998 1999 2000 20012002 2003 2004 2005 2006 20072008 2009 2010 2011 -2-1 012 ur_star12 -5 0 5 10 y_star12 1978-2011 (34 obs) slope: -0.22 (se = 0.03) Adjusted R-squared = 0.63 RMSE = 0.47 Mexico
  • 71. Based on y_chg β Obs Adjusted R² RMSE Argentina -0.221*** (0.0524) 32 0.352 1.751 Brazil -0.215*** (0.0438) 29 0.452 0.685 Chile -0.580*** (0.0840) 32 0.601 2.177 Colombia -0.622*** (0.0885) 32 0.609 1.048 Costa Rica -0.221*** (0.0496) 32 0.378 0.960 Ecuador -0.355** (0.152) 21 0.181 1.982 El Salvador 0.000950 (0.116) 23 -0.048 1.254 Honduras 0.0421 (0.115) 21 -0.045 1.313 Jamaica -0.154** (0.0716) 32 0.105 1.109 Mexico -0.207*** (0.0339) 32 0.540 0.690 Nicaragua -0.170* (0.0928) 32 0.070 2.039 Panama -0.204*** (0.0357) 32 0.506 0.975 Peru -0.118*** (0.0382) 32 0.216 1.298 Uruguay -0.279*** (0.0524) 32 0.468 1.332 Venezuela -0.212*** (0.0318) 32 0.584 1.199 Average -0.234 0.331 Okun’s Coefficients for Latin America
  • 72. Distribution of Employment Responsiveness
  • 73. Okun’s Law Coefficients: Unemployment Elasticities vs. Employment Elasticities
  • 74. Determinants of Okun's Law Coefficients (Employment Elasticities) (1) (2) (3) (4) (5) Average Employment Growth -0.017 -0.036* -0.023 [-0.885] [-1.793] [-1.040] Informality -0.006*** -0.007*** -0.004** [-3.889] [-4.257] [-2.264] Services (% of GDP) 0.006*** 0.005*** [5.164] [2.990] Constant 0.148*** 0.383*** -0.153*** 0.465*** 0.132 [4.172] [5.610] [-2.815] [5.715] [0.966] N 82 72 76 72 67 R2 0.01 0.178 0.265 0.214 0.314 Note: t-statistics are in parenthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.
  • 75. Determinants of Employment Elasticities (Non-OECD) (1) (2) (3) Average Employment Growth -0.026 -0.039 -0.031 [-1.109] [-1.543] [-1.251] Informality -0.004* -0.003 -0.003* [-1.884] [-1.522] [-1.716] Services (% of GDP) 0.008*** 0.004 0.006** [4.173] [1.577] [2.433] Labor Market 0.086** 0.084** [2.644] [2.549] Product Market 0.007 0.009 [0.566] [0.693] Constant -0.625** 0.095 -0.589** [-2.272] [0.653] [-2.094] N 54 54 52 R2 0.455 0.349 0.45 Note: t-statistics are in paranthesis. ***, **, and * indicates significance at 1, 5, and 10 percent levels, respectively.
  • 76. Okun Outside OECD Tentative Conclusions 1. Law holds better-than-(we)-expected. 2. Coefficient for non-OECD countries is smaller (around -0.2 on average) than for OECD countries, but there is considerable heterogeneity 3. Variation in Okun’s coefficient can be accounted for partially by country characterics such as degree of informality and product market flexibility