This document summarizes evidence on Okun's Law from studies of countries in the OECD. Key points: - Okun's Law, which links changes in unemployment to changes in output, fits the data well for most OECD countries based on studies of 20 countries since 1980. - There is substantial variation in the coefficient between countries, but exceptions are small or exaggerated. - Recent "jobless recoveries" in some countries can be explained by slow output growth rather than a breakdown of Okun's Law, which still holds. - Further analysis looks at Okun's Law for different age groups, non-OECD countries, and uses employment data rather than just unemployment. Addressing issues

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