Economic Growth and Regional Labor Market Development in German Regions: Okun’s Law in a Spatial Context

Christian Oberst and Jens Oelgemöller ()
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Jens Oelgemöller: Institute for Spatial and Housing Economics, Postal: Center of Applied Economic Research Muenster, University of Muenster, Am Stadtgraben 9, 48143 Muenster, Germany

No 5/2013, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: The inverse relationship between economic growth and labor market developments in the form of changes in the unemployment rate is known in economic literature as Okun’s law. The objectives of this paper are to estimate a regionalized Okun coefficient and its associated (regional) unemployment thresholds. The suitability and limitations of Okun’s law as a rule of thumb for regional economic growth and labor market policy are also discussed. Motivated by “Germany’s Jobs Miracle” in face of the economic crisis of 2008 and 2009, the existence of an uncoupling effect between economic and unemployment growth is questioned and whether regional economic growth is a driving force for regional labor market development. A regional dataset for the years 2002 to 2009 is employed for this study. The spatial dimension is pursued in two ways: a non-parametric approach using functionally defined labor markets as study areas and the application of spatial econometric panel data models, in particular the Spatial Durbin Error Model. The rationale is that functionally defined regional study areas are the appropriate spatial reference level for the analysis. It is found that, without accounting for spatial dependence, regionalized Okun coefficients are likely to be overestimated. The empirical results confirm a positive impact of economic growth on labor market performance; however, the estimated effect of regional economic growth is far lower than would have been expected. The paper illustrates the limited transferability of Okun’s law as a rule of thumb for growth dynamics on a regional level as well as limitations of regional growth dynamics for regional labor market development.

Keywords: Okun’s Law; Spatial Econometrics; Regional Labor Markets; Regional Growth (search for similar items in EconPapers)
JEL-codes: C21 C23 E24 E32 R12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-03
New Economics Papers: this item is included in nep-geo and nep-ure
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Citations: View citations in EconPapers (15)

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