The Output Gap and Youth Unemployment: An Analysis Based on Okun’s Law

Abstract

The impact of economic fluctuations on the total unemployment rate is widely studied, however, with respect to age- and gender-specific unemployment, this relationship is not so well examined. We apply the gap version of Okun’s law, aiming to estimate youth unemployment rate sensitivity to output deviations from its potential level. Additionally, we aim to compare whether men or women have a higher equilibrium unemployment rate when output is at the potential level. Contrary to most studies on age- and gender-specific Okun’s coefficients, which assume that the effect of output on unemployment is homogenous, we allow a different effect to occur, depending on the output gap’s sign (positive/negative). The focus of the analysis is on 28 EU countries over the period of 2000–2018. The model is estimated by least squares dummy variable estimator (LSDV), using Prais–Winsten standard errors. We did not find evidence that higher equilibrium unemployment rates are more typical for men or for women. The estimates clearly show the equilibrium level of youth unemployment to be well above that of total unemployment, and this conclusion holds for both genders. We assess greater youth unemployment sensitivity to negative output shock, rather than to positive output shock, but when we take confidence intervals into consideration, this conclusion becomes less obvious.

The impact of macroeconomic and structural factors on the unemployment of young women and men

“…In turn, when assessing the situation of young people and comparing it to that of adults, the researchers concluded that young people are more vulnerable to economic fluctuations with respect to their unemployment. For almost all countries, research confirms a higher youth—rather than total—unemployment rate sensitivity to output gap fluctuations (both positive and negative) (Butkus and Seputiene 2019 ; Bluedorn et al 2019 ; Dunsch 2017 ) and suggests highest absolute Okun coefficients among youth cohort (Hutengs and Stadtmann 2013b ) (Hutengs and Stadtmann 2013a ). It is worth emphasizing that “Okun coefficient” shows significant regional differences as well (Kliber 2021 ), (Bartosik 2020 ); it may also apply to countries, as a result of which any turbulence in the economy may, to a various extent, be manifested in a deterioration of the situation of young people.…”

The Relationship between Economic Growth and Unemployment Rates: Validation of Okun’s Law in Panel Context

“…He investigated the relationship between GDP and unemployment rates of different age cohorts in OECD countries, and found higher Okun's coefficient among people aged 15 -24 in both developed and emerging countries within OECD. Butkus and Seputiene (2019) applied the gap version of Okun's Law to estimate the relationship between youth unemployment and GDP growth in 28 EU countries between 2000 and 2018. They confirm the validity of Okun's Law in most of the countries, but due to countryspecific factors, the estimated Okun's coefficients differ between countries.…”

Okun's law and assessment of stimulus to the economy of Bosnia and Herzegovina

“…In the relevant literature, there is also empirical evidence on youth unemployment showing more reaction to changes in economic growth in comparison to older population cohorts. Researchers in those studies confirmed higher unemployment rates' responsiveness of young males and females to changes in output than that of total unemployment of the same gender (Butkus & Seputiene, 2019). This finding of age and gender sensitivity in value of Okun coefficient are recommended to be considered in economic policy formulations aimed at reducing the unemployment rate (Kim & Park, 2018).…”