Dissecting Okun’s law beyond time and frequency

ABSTRACT

The stability of Okun’s law mostly has been investigated over time. In this paper, we apply wavelet analysis to dissect the relationship between GDP growth and changes in the unemployment rate by time and frequency. Furthermore, we analyse whether changes in Okun’s law are related to changes in the underlying production function or are related to changes in the relationship between unemployment and employment. The results show that coherence of GDP growth and changes in the unemployment rates at lower frequencies vanished with the Great Moderation. Coherence at higher frequencies shows an on-off pattern with a re-emergence of Okun’s law during the Great Recession. These changes appear to be mainly driven by changes in the underlying production function.

KEYWORDS:

• Okun’s law
• wavelet analysis
• GDP growth
• unemployment
• employment

JEL CLASSIFICATION:

• C40
• E24
• E32

Acknowledgments

We are grateful to Uwe Hassler for his careful reading of the manuscript and his valuable suggestions, and a referee for constructive comments.

Disclosure statement

No potential conflict of interest was reported by the authors.