On the Determinants of the Okun's Law: New Evidence from Time-Varying Estimates

This paper revisits, by means of both time series and panel data analyses, the empirical regularity identified by Okun's (in: Proceedings of the business and economics statistics section, American Statistical Association, Washington, DC, 98-103, 1962) seminal paper. Based on a sample of 85 advanced and developing economies between 1978 and 2014, we confirm the existence of an average negative and statistically significant Okun's relationship. At the same time, results suggest that the relation varies substantially across countries and times. Finally, we identify several factors affecting the variation in Okun's coefficient across and within countries. Across countries, the relationship is stronger in countries with higher average unemployment, a larger share of public employment, lower informality and smaller agricultural sectors, and one that is more diversified. Within countries, in addition to some of these factors, we find that deregulation in labor and product markets and recessions have strengthened the response of unemployment to the business cycle.