ALLEGED INSTABILITY OF THE OKUN LAW RELATIONSHIP IN AUSTRALIA - AN EMPIRICAL-ANALYSIS

The determinants of the long run equilibrium unemployment rate are modelled through a cointegrating regression. The residual term, which represents the error correction mechanism, is used in the testing of a general dynamic model to obtain a simplified representation of the data generation process over the period 1968(2)-1989(2). The long period equilibrium unemployment rate, which is 7(1), is shown to be related to the rate of capacity utilization, a structural change variable and the rate of capacity growth. Steady state rates of unemployment are calculated which are based on different assumptions about the magnitudes of the independent variables. In contrast to the other two variables, changes in the rate of capacity utilization are shown to have only modest effects on the steady state unemployment rate. The Okun coefficient is inversely related to the steady state unemployment rate, which accords with intuition. The statistically significant decline in the trend growth rate of non-farm GDP in the 1970s explains, in part, the apparent instability of the Okun's law relationship which is revealed in recent studies. These studies can be criticised for their econometric methodologies. © 1991, Taylor & Francis Group, LLC. All rights reserved.