The extensive literature on Okun's law underscores the significance of this statistical regularity since its discovery in the United States in 1962, both in the realm of economic policy and academia. This is because understanding the unemployment-output relationship allows us to quantify the loss of production attributable to maintaining high unemployment rates. It also enables us to explore the possibility of predicting the impact of economic activity variations on the unemployment rate, and, based on this, evaluate the costs in terms of social welfare implications.
A review of this literature reveals a high level of heterogeneity among the estimated coefficients of the relationship for different countries and regions and at different points in time. Consequently, it is impossible to extract the idea of a single value that represents the relationship between unemployment and output for all times and places. So, the question that arises next is: what are the determining factors that cause the Okun relationship to yield different values between countries or regions? The thesis provides evidence of the importance of considering certain labor market characteristics to explain the differences in the unemployment-output relationship between countries or regions. However, not everything can be explained by the differences in labor legislation in each country, making labor markets more or less flexible in response to cyclical economic fluctuations. There is even evidence suggesting that in some cases, the variable attempting to measure the different levels of labor legislation is not significant in explaining these differences.
In addition to the variables already identified by previous literature as explanatory factors for Okun's law (labor productivity and production structure), this thesis adds self-employment, informal employment, employment without social security coverage, and unpaid family work. These variables are crucial for understanding the differences in Okun's law among less developed countries since these characteristics are prevalent in significant proportions, albeit with a heterogeneous distribution.
Furthermore, this thesis provides evidence indicating that the choice of the base model for the relationship or various methodological aspects for estimating it also contributes to some variability in the results. Therefore, these should be considered in future research on the subject.
Finally, this thesis also offers evidence that how unemployment is measured also influences the unemployment-output relationship. When a portion of unemployment remains "hidden" due to the implementation of some temporary economic policy measure, and official statistics do not reflect it, the Okun relationship appears to weaken or break, while the underlying relationship between economic activity and idle resources remains intact.
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