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The using Okuns law to track and analyze the changes in the unemployment rates over the last decade - Research Paper Example

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Output and employment have a tendency to more simultaneously. In 1962, Arthur Okun conducted an empirical research over the relation between changes in unemployment to the changes in gross national product in US economy…
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The using Okuns law to track and analyze the changes in the unemployment rates over the last decade
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Download file to see previous pages Output and employment have a tendency to more simultaneously. In 1962, Arthur Okun conducted an empirical research over the relation between changes in unemployment to the changes in gross national product in US economy.The Using Okun’s law to track and analyze the changes in the unemployment rates over the last decade.He found that for every 3 percent increase in real output of the country, unemployment decreased by 1 percent. The observers of this result started to dub it as “Okun’s Law”. Thus for the United States, Okun coefficient is 3. It can logically be expected the output of a country to approximately move one for one with the level of employment. Okun, however, argued that Measures unemployment is less volatile to any economic change than output. This is for, according to him, fluctuations in working hours and labor force participation generally hide underemployment to some extent. (Okun, 1962). Okun coefficients are not same for all countries. It has been found by the economists that most of the developed or industrialized nations of the world have higher Okun coefficients than United States. It simply implies that, in most of the other industrialized nations of the world the rates of unemployment have a tendency to vary less for a given fluctuation in gross domestic product than in case of the United States. A reason for this could be that in United States labor market is less regulated than in other countries and hence companies can more easily lay off their workers during economic slowdowns. In most of the industrialized countries, there are stronger implicit job protections by the societies, stronger unions, and higher governmental restrictions on laying off workers than in United States. (Kaufman, 1988; Moosa, I. A.(1997) However, over the years, many industrialized countries have undertaken various reform measures to reduce restrictions on labor market so that companies can exercise more freedom in laying off workers at the time of economic downfall. Thus, Okun coefficients of many industrialized countries like UK, Canada, Germany, Japan, France and so on have been lowered in recent time than before. However, USA still has the largest Okun coefficient. (Kaufman, 1988; Moosa, I. A.(1997) One interesting thing about Okun coefficient is that it can change over time as the relationship between output growth and change in unemployment depends to a large extent on a number of other factors like technology, social regulations, demographics, laws, etc. As these factors change, Okun coefficient might also change. (Lee, 2000). Here this Okun’s law will be used to analyze the movement in the rate of unemployment in US over the last decade. Here an attempt will be made to find out whether Okun coefficient is still the same in US as documented by Arthur Okun. The last decade has experienced huge economic fluctuation, and hence it would be quite interesting to find out the value of Okun coefficient under such economic slow down in US. At present, most of the economies throughout the world are going through a critical phase of recession and among all the economies. The situation has been so critical that the most power economies in the world also have not been able to escape this economic crisis. Economies of U.S., Japan, China, U.K. etc are all suffering from severe demand crunch and consequently fall in production and employment. U.S. is the Worst hit country by the current recession. The ongoing economic crisis through out the whole world owes it origin in U.S. following a huge credit crisis in the home loan market. Since early 2008, the U.S. economy has been looming under recession. Many economists are even of the opinion that this recession has started during the last quarter of 2007 itself. The effect of recession has not been confined to U.S. economy only. In late 2007 and even early 2008, most of the stock market indices across the world were touching the sky. Under such scenario, corporate houses were showing over enthusiasm and in several of countries money was flowing in huge ...Download file to see next pagesRead More
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