This study examines whether Okun's Law varies across business-cycle phases and whether labor-market rigidity shapes the unemployment-output relationship across countries.
The analysis covers 52 countries over 1980–2020 and distinguishes between expansionary and recessionary periods. It applies country-level autoregressive distributed lag models and Pooled Mean Group panel ARDL estimators to estimate short-run and long-run Okun coefficients. Labor-market rigidity is incorporated through the OECD Employment Protection Legislation index, while Granger causality and impulse-response analyses are used to examine dynamic interactions.
The results indicate long-run cointegration between output and unemployment in most countries, with more stable evidence in developed economies. Okun's coefficients are larger in magnitude during recessions, indicating stronger unemployment responses to output contractions. Short-run effects are relatively stronger in less rigid labor markets, whereas higher employment protection is associated with more stable long-run unemployment dynamics. Adjustment speeds differ across country groups, with slower responses observed in developed economies. The directional interaction between output and unemployment also varies across business-cycle phases, with unemployment feedback becoming more pronounced during recessions.
The findings should be interpreted as associational rather than causal, since employment protection is related to broader institutional characteristics, including informality, bargaining structures, and enforcement quality.
This study contributes by integrating business-cycle asymmetry and labor-market rigidity within a unified cross-country framework for examining Okun's Law. By incorporating the OECD Employment Protection Legislation index into country-level and panel ARDL models, it provides new evidence on how institutional settings are associated with the unemployment-output relationship across different phases of the business cycle.
