Okun’s law within the OECD : A cross-country comparison

Abstract: In the 60’s, the first article identifying the relationship between output growth and unemployment were released, with the purpose of providing a tool for US authorities to estimate the effect of labour policy on output. This article, presented by Arthur Okun, came to lay the foundation for the commonly known empirical relationship, named Okun’s law. However, since the 60’s, the world has gone through political and economic shocks, such as the oil crisis, fall of the berlin wall, the crisis of the 90’s, the financial crisis and crisis of 2008. These events open up the question: has the relationship changed? This study focuses on 21 OECD countries for the time period 1991-2016, with the purpose to identify their respective relationship between output growth and unemployment, namely their Okun coefficient. The test that will be performed calculates the marginal effects of respective country to observe differences. Further, this study aims to give the reader a greater understanding of the complexity underlying the simple model Okun presented in the 60’s. This is done by investigating whether there are any differences in the coefficient for countries within the EU, compared to those out of the EU. To explain the complexity further we check whether factors that affects labour market rigidity, such as union density, create differences in the Okun coefficient. The results from the study shows that the Okun coefficient differs between different countries. They also show that countries belonging to the European Union has a lower Okun’s coefficient on average. Finally, the results show that countries with a union density of over 75 % have a lower coefficient on average.