The link between unemployment and real economic growth in developed countries

Ivan Kitov

MPRA Paper from University Library of Munich, Germany

Abstract: Ten years ago we presented a modified version of Okun’s law for the biggest developed economies and reported its excellent predictive power. In this study, we revisit the original models using the estimates of real GDP per capita and unemployment rate between 2010 and 2019. The initial results show that the change in unemployment rate can be accurately predicted by variations in the rate of real economic growth. There is a discrete version of the model which is represented by a piecewise linear dependence of the annual increment in unemployment rate on the annual rate of change in real GDP per capita. The lengths of the country-dependent time segments are defined by breaks in the GDP measurement units associated with definitional revisions to the nominal GDP and GDP deflator (dGDP). The difference between the CPI and dGDP indices since the beginning of measurements reveals the years of such breaks. Statistically, the link between the studied variables in the revised models is characterized by the coefficient of determination in the range from R2=0.866 (Australia) to R2=0.977 (France). The residual errors can be likely associated with the measurement errors, e.g. the estimates of real GDP per capita from various sources differ by tens of percent. The obtained results confirm the original finding on the absence of structural unemployment in the studied developed countries.

Keywords: unemployment; GDP; modelling; Okun’s law (search for similar items in EconPapers)
JEL-codes: E1 E3 E32 E50 J64 (search for similar items in EconPapers)
Date: 2021-02-07, Revised 2021-02-07
New Economics Papers: this item is included in nep-gro, nep-lab, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: The link between unemployment and real economic growth in developed countries (2021)
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