Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun’s Law

Abstract

The global financial crisis deeply impacted labour markets around the globe. In the case of the United States, some commentators have argued that the subsequent rise in unemployment exceeded previous estimates of the elasticity of the unemployment rate with respect to output growth, a statistical relationship known as Okun's law. In contrast, others find a stable, long-term estimate of Okun's coefficient implying that the deviation in unemployment during the crisis resulted from a larger output gap (not a structural shift in the trend). Ultimately, estimates of this relationship will depend on the methodology and data period utilized. Focusing more on short-term fluctuations, changes in unemployment are decomposed to identify the association with other channels of labour market adjustment (hours, productivity and labour force). Results presented in this paper confirm the crosscountry variation in the responsiveness of unemployment in the wake of the Great Recession. In the United States, Canada, Spain and other severely affected economies, estimates of Okun's coefficient increased sharply, departing from precrisis levels. In other countries, where unemployment has remained subdued, such as Germany and the Netherlands, the coefficient has fallen dramatically over the shortterm. While other factors can explain the heterogeneous impact of the global financial crisis on labour markets in OECD countries, this paper focuses on the contribution of labour market institutions (employment protection legislation) in explaining crosscountry differences and shifts in the estimated Okun's coefficient. In this regard, empirical evidence confirms that the responsiveness in the unemployment rate during the global downturn was lower in countries where workers are afforded greater employment protection such as Germany.

An Optimistic Analysis of the Means of Implementation for Sustainable Development Goals: Thinking about Goals as Means

“…Apparently, these are intended as means to achieve other goals such as poverty and hunger elimination, especially through the intermediate goal of providing people with decent work. While economic growth and industrialization were widely assumed to lead to these outcomes in the past, recent experience has questioned these assumptions as many parts of the world experience "jobless growth" and "jobless recoveries" and as many industries' need for workers steadily decreases due to advances in productivity and technology [10][11][12]. The concept of "green growth" holds out the possibility that economic growth could be made compatible with ecological constraints and provide decent work for all, but to what extent this is achievable is still an empirical question [13,14].…”

A State-Level Analysis of Okun's Law

“…While most of the literature has found significant regional disparities in Okun's coefficient (e.g., in the Czech Republic and Slovakia [Durech et al, 2014], Canada [Adanu, 2005], and France [Binet and Facchini, 2013]), some countries were not found to have significant regional variation (e.g., Spain [Villaverde and Maza, 2009] and Greece [Apergis and Rezitis, 2003]). Moreover, the strength of the relationship has been found to vary across countries (see Paldam [1987], Kaufman [1988], Moosa [1997], Lee [2000], Freeman [2001, Cazes et al [2013], Hutengs and Stadtmann [2013]). This variation is often attributed to differences in employment protection and minimum wage laws, the power of trade unions, and demographics.…”

Unemployment and Labor Reallocation in Europe

“…Using country specific estimates of the impact output fluctuations have on employment as in Ball et al (2013), most of the unexplained variation vanishes, however. Author's such as Knotek (2007) and Cazes et al (2013) have additionally pointed out that the coefficient on output in the Okun equation varies over time with an increasing coefficient leading to an underestimation of the employment response to output declines in the Great Recession. However, our sample is restricted to a single decade, which we think limits this concern and leads us to assume zero time variation in the Okun coefficient, i.e.…”