An empirical analysis of Okun’s law at a regional level: evidence from the NUTS 2 European regions

ABSTRACT

In this study, Okun’s law is empirically assessed for the 257 NUTS2 (Nomenclature of Territorial Units for Statistics) European regions over the period 2010–2020, which is characterised by intense economic, societal and political changes as a consequence of the 2009 economic crisis, the austerity measures followed and the COVID-19 pandemic outbreak. Okun’s law equation is estimated using instrumental variables regression, employing a two-step methodology: (1) a panel regression estimator to obtain predicted variables of the endogenous variable (Gross Domestic Product (GDP) % change) by including the appropriate instruments in the model, (2) a linear-mixed fixed, random coefficient model and empirical Bayes predictions for the random intercepts and random slopes to obtain Okun’s coefficients. Study results confirm the Okun’s law for all regions under consideration and suggest that unemployment responses to economic growth differ among regions; either due to business cycle effects or structural labour-market factors. For regions depicting the strongest inverse impact of GDP on unemployment, a cyclical recovery is expected to be accompanied by a reduction in unemployment; while the weakest inverse relationship observed is associated with structural factors (i.e. industry composition, labour-force skills, long-term unemployment). At policymaking level, considering regional labour-market idiosyncrasies is of utmost importance to differentiate labour policies.

KEYWORDS:

• GDP growth
• unemployment
• regional data
• NUTS 2 classification
• business cycle

JEL CLASSIFICATION:

• C13
• C23
• E24
• J20
• R10

Acknowledgements

This study is part of post-doctoral research for which the corresponding author held a scholarship from the Hellenic Open University. The corresponding author was free in study design, analysis, and results interpretation, as well as writing and submitting the manuscript for publication. The views expressed in this manuscript are those of the authors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The research leading to these results has received funding from the project titled “80136-Enhancing Research at the Hellenic Open University Schools”, which is granted by the Hellenic Ministry of Education and Religious Affairs (N. 25076/B9/F11/121/B/894/05-03-21) and is implemented by the Special Account for Research Funds of the Hellenic Open University.