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This paper evaluates the robustness of the Okun‟s law which states that an increase of the economic growth rate by 3 percent (above the normal rate) was expected to reduce the unemployment rate by 1 percentage point. This relationship has been explored using time series data from 1981-2010 for 15 G20 countries at individual level as well as at pooled level.
This shows that the Okun’s law is statistically valid for most of the countries. But the quantitative estimates are far from uniform. It has also been found that the estimates are sensitive to the choice of models. It compared estimates using two models- first difference model, and the “gap” approach. The relevant data for the latter are constructed alternatively from the HP Filter. Further, the random effects model has been used for estimating the coefficient at pooled level data. The analysis shows an evidence of lower output gain associated with higher unemployment for most of the countries. Hence, this paper estimates suggest that Okun‟s rule of thumb is much closer to two than three.
