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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
A State-Level Analysis of Okun’s Law
Amy Y. Guisinger
Ruben Hernandez-Murillo
Michael T. Owyang
Tara M. Sinclair
Abstract

Okun’s law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential. In this paper, we estimate Okun’s coefficients for each U.S. state and examine the potential factors that explain the heterogeneity of the estimated Okun relationships. We find that indicators of more flexible labor markets (higher levels of education achievement in the population, lower rate of unionization, and a higher share of nonmanufacturing employment) are important determinants of the differences in Okun’s coefficient across states. Finally, we show that Okun’s relationship is not stable across specifications, which can lead to inaccurate estimates of the potential determinants of Okun’s coefficient.


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Amy Y. Guisinger & Ruben Hernandez-Murillo & Michael T. Owyang & Tara M. Sinclair, A State-Level Analysis of Okun’s Law, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1523, 21 Oct 2015.
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Keywords: correlated unobserved components; potential output; natural rate of unemployment
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