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Federal Reserve Bank of St. Louis
Working Papers
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. This relationship is often referred to by policy makers and used by forecasters. In this paper, we estimate Okun's coefficients separately for each U.S. state using an unobserved components framework and find variation of the coefficients across states. We exploit this heterogeneity of Okun's coefficients to directly examine the potential factors that shape Okun's law, and 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 non-manufacturing employment) are important determinants of the differences in Okun's coefficient across states.


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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 St. Louis, Working Papers 2015-29, 08 Sep 2015, revised 17 Oct 2017.
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Keywords: Correlated unobserved components; potential output; natural rate of unemployment
DOI: 10.20955/wp.2015.029
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