The dynamics of Okun’s law: cross-country analysis across economic cycles (1980–2023)

Abstract

Economic dynamics vary across business cycles, particularly in the relationship between output and unemployment. This study examines Okun’s Law across 92 countries from 1980 to 2023, focusing on its validity and stability during expansion, recession, and recovery. The results confirm that Okun’s Law broadly holds, but its strength is highly regime- and country-specific. A consistent pattern emerges: the Okun coefficient is steeper during recessions, flatter during expansions, and statistically weaker or insignificant during recoveries, consistent with jobless recoveries. Cross-country evidence further reveals that high-income and OECD economies exhibit robust Okun relationships across regimes, while many low-income economies display weak or non-significant responses due to informality and structural labor market rigidities. Dynamic specifications confirm short-run stickiness in employment, with cumulative effects reinforcing the asymmetric adjustment of unemployment to output. By introducing a three-regime empirical design and incorporating post-pandemic labor market dynamics, this study provides the most comprehensive cross-country assessment of Okun’s Law to date. The findings underscore the importance of regime-contingent policy strategies: countercyclical support during recessions, targeted incentives during recoveries, and structural reforms in economies with weak output–employment linkages.