The Updated Okun Method for Estimation of Potential Output with Broad Measures of Labor Underutilization: An Empirical Analysis

Claudia Fontanari, Antonella Palumbo and Chiara Salvatori
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Claudia Fontanari: Roma Tre University.
Chiara Salvatori: Roma Tre University.

No inetwp158, Working Papers Series from Institute for New Economic Thinking

Abstract: This paper extends to different indicators of labor underutilization the Updated Okun Method (UOM) for estimation of potential output proposed in Fontanari et al (2020), which, from a demand-led growth perspective, regards potential output as an empirical approximation to full-employment output, as in A.M.Okun`s (1962) original method. Based on the apparent incapability of the official rate of unemployment to fully account for labor underutilization, in this paper we offer estimates of Okun`s law both with broad unemployment indicators and with an indicator of `standardized hours worked` which we propose as a novel measure of the labor input. The paper reflects on the possible different empirical measures of full employment. The various measures of potential output that we extract from our analysis show greater output gaps than those produced by standard methods, thus highlighting a systematic tendency of the latter to underestimate potential output. Output gaps that underestimate the size of the output loss or that tend to close too soon during recovery, may produce a bias towards untimely restriction.

Keywords: potential output; alternative unemployment indicators; Okun`s law; demand-led growth (search for similar items in EconPapers)
JEL-codes: C30 E12 E24 E60 O40 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2021-05-11
New Economics Papers: this item is included in nep-hme and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp158

DOI: 10.36687/inetwp158

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