Macro Economics Assignment

Okuns Coefficient for Different Countries

By Aayush Shah
1401105
Okuns Coefficient and Unemployment Rates for the
period 1971 - 2012

Country

Okun's
Coefficient w

Australia

-1.2

Average
Unemployment Rate
(1971 - 2012)
6.5

Canada

-1.7

7.7

France

-1.4

7.7

Germany

-1.2

6.3

Italy

-1.2

7.2

Japan

-4.1

2.9

Korea, Rep.

-3.2

3.6

Sweden

-1.5

4.9

United Kingdom

-1.8

7.3

10

United States

-1.7

6.4

Okuns Law states that for every 1% increase in the unemployment rate, a country's GDP will be
roughly an additional 2% lower than its potential GDP.
While a stable Okuns Law fits the data for most countries, the coefficient in the relationship the
effect of a 1% change in output on the unemployment rate varies across countries as seen above.
Countries with higher average unemployment rates have higher Okun coefficients suggesting there
are common factors that drive both variables. It appears that the labour markets of many countries
have idiosyncratic features that influence the coefficient. These features not one or two variables
that we can measure for all countries probably account for most of the variation in the coefficients.
Unusually high incidence of temporary employment contracts, which makes it easier for firms to
adjust employment when output changes, raises the Okun coefficient. Japans small Okun coefficient
probably reflects Japans tradition of 'lifetime employment', which makes firms reluctant to make
workers redundant implying that the kind of workforce and the job contracts affect the Okun
coefficient.
While the above relationship is not the only one affecting GDP and unemployment, it does seem to
offer a lot of explanations.

Source: Unemployment and GDP Data from Bureau of Labor Statistics

References: Centre for Economic Policy Research (VoxEU.org)