Archive for February 8th, 2010

Okun’s law in few economies

February 8, 2010

Christopher Neely of St Louis Fed has a nice snapshot on Okun’s law in few economies:

Output and employment commonly move together. In 1962 Arthur Okun documented that U.S. unemployment tended to fall by 1 percentage point for every 3-percentage point rise in gross national product (i.e., output); observers subsequently dubbed this empirical regularity “Okun’s law”—thus, the United States had an Okun coefficient of 3.

Output might logically be expected to move approximately one for one with employment, yet Okun argued that measured unemployment is less volatile than output because fluctuations in hours per worker and labor force participation hide some underemployment.

Economists have long noted that most industrialized countries have larger Okun coefficients than do the United States and—to a lesser extent—Canada and the United Kingdom. In other words, most industrialized countries’ unemployment rates tend to vary less for a given gross domestic product (GDP) fluctuation than does that of the United States. The usual explanation for this is that the United States, Canada, and the United Kingdom have less heavily regulated labor markets in which businesses can more easily lay people off during slowdowns. Most countries have some combination of stronger implicit social job protections (e.g., Japan), stronger unions, or greater formal restrictions on releasing workers.

The analysis shows Okun’s law has been true in this crisis as unemployment rates have increased higher in US compared to others.

However, there is a trade-off:

While job stability is a good thing, economics often requires trading one good for another. Restrictions on dismissing workers make firms more reluctant to hire workers in the first place. There fore, countries that heavily regulate labor markets tend to have higher unemployment. Since 1989, for example, U.S. monthly unemployment has averaged 5.55 percent while German and French unemployment rates have averaged 7.93 and 9.62 percent, respectively. There is no free lunch with more labor market regulation.

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Going back to Glass Steagall Act

February 8, 2010

Though Volcker rules have in a way gotten back to Glass Steagall, this paper by Jan Kregel of Levy Institute advices against going back. 

Dimitri Papadimitriou, President of Levy Institute provides a summary in the beginning: 

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The euro at ten – lessons and challenges

February 8, 2010

ECB hosts a biennial conference on different topics. In 2008, it hosted fifth such conference with the theme – The Euro at ten: lessons and challenges.

I did cover a few papers presented in my previous posts (cant locate them now).

Anyways, ECB has compiled all the papers and discussion in one book. It is a good time to review the literature on Euro given the current pressure on european economies. This crisis has posed several questions.  The question of whether having a single currency helps or not, has also been brought to life by the crisis. The US economists may have underestimated the success of Euro in its first ten years. This crisis is testing both – Euro/EMU framework and optimistic Euro economists.

Addendum:

Links of previous conferences:


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