Explaining Deviations from Okun's Law

Claudia Foroni and Francesco Furlanetto

No 17369, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Despite its stability over time, as for any statistical relationship, Okun's law is subject to deviations that can be large at times. In this paper, we provide a mapping between residuals in Okun's regressions and structural shocks identified using a SVAR model by inspecting how unemployment responds to the state of the economy. We show that deviations from Okun's law are a natural and expected outcome once one takes a multi-shock perspective, as long as shocks to automation, labor supply and structural factors in the labor market are taken into account. Our simple recipe for policy makers is that, if a positive deviation from Okun's law arises, it is likely to be generated by either positive labor supply or automation shocks or by negative structural factors shocks.

Keywords: Okun's law; Labor markets; Business cycle fluctuations; Bayesian var (search for similar items in EconPapers)
JEL-codes: C32 E24 E32 (search for similar items in EconPapers)
Date: 2022-06
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Related works:
Journal Article: Explaining deviations from Okun’s law (2026)
Working Paper: Explaining Deviations from Okun’s Law (2022)
Working Paper: Explaining deviations from Okun’s law (2022)
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