Okun's Law and Employment Adjustment

Yoshio Kurosaka

Japanese Economy, 2012, vol. 39, issue 2, 87-107

Abstract: This study estimates and conducts a factor analysis on Okun's coefficient to look at the labor productivity effect that can be derived from the Okun coefficient residual, and indirectly examines the employment adjustment speed of the Japanese economy in 1981-2010. The key findings are as follows. Okun's coefficient for the Japanese economy was calculated at 10.8 for the periods 1981-2000 and 2008-10, and 3.0 for the period 2001-7 (= 1 ÷ 0.329), with the value of Okun's coefficient falling in the 2001-7 period, but then rebounding to its original value in 2008 and after. The labor productivity effect was found by calculating the difference remaining after subtracting the direct effect, labor supply effect, and labor hours effect from Okun's coefficient. It was 6.43 in the periods 1981-2000 and 2008-10, and 1.03 in the period 2001-7 when Okun's coefficient fell. This means that corporate employment hoarding had decreased, indirectly showing that employment adjustments had been made quickly. In the period 2008-10, following the collapse of Lehman Brothers, Okun's coefficient rebounded to 10.8 and the labor productivity effect returned to its previous level, thus suggesting that the overemployment being maintained by companies was largely eliminated in the 2001-7 period. It was not so much that the pace of employment adjustment itself changed after the collapse of Lehman Brothers, but rather that the magnitude of the Lehman collapse was so large as to require massive employment adjustments to be made even at the previous pace of employment adjustment.

Date: 2012
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DOI: 10.2753/JES1097-203X390204

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