Review of Regional Research

, Volume 37, Issue 1, pp 59–90 | Cite as

An analysis of Okun’s law for the Spanish provinces

Original Paper


The inverse relationship between unemployment and Gross Domestic Product (GDP), commonly known as Okun’s law, has been traditionally analysed in the economic literature. Its application to Spain is particularly interesting due to the sharp effect that economic shocks have on unemployment. The purpose of this study is to analyse the relationship between unemployment and economic growth for the Spanish provinces between 1985 and 2013, a period characterized by economic booms and recessions that had a great impact on unemployment. After testing the time series properties of provincial GDP and unemployment, we specify and estimate the difference version of Okun’s law using VAR and panel VAR techniques. The obtained results point out that Spain’s provinces show large differences in their unemployment sensitivity to economic variations. In particular, provinces that show less diversified industries, a more developed services sector and higher rates of labour participation suffer from higher variations in unemployment rates.


Okun’s law Unemployment Output fluctuations Spanish provinces 

JEL classification: C32

C33 J23 R11 


  1. Adanu K (2005) A cross-province comparison of Okun’s coefficient for Canada. Appl Econ 37:561–570CrossRefGoogle Scholar
  2. Amarelo C (2013) La relació entre el creixement econòmic i la taxa d’atur en el cas català. Generalitat de Catalunya, Departament d’Economia i Finances, Direcció General d’Anàlisi i Política Econòmica, BarcelonaGoogle Scholar
  3. Apergis N, Rezitis A (2003) An examination of Okun’s law: evidence from regional areas in Greece. Appl Econ 35(10):1147–1151CrossRefGoogle Scholar
  4. Attfield CLF, Silverstone B (1997) Okun’s coefficient: a comment. Rev Econ Stat 79:326–329CrossRefGoogle Scholar
  5. Ball L, Leigh D, Loungani P (2013) Okun’s law: fit at 50? IMF Working Paper, vol. WP/13/10. IMF, Washington, DCCrossRefGoogle Scholar
  6. Bande R, Karanassou M (2009) Labour market flexibility and regional unemployment rate dynamics: Spain 1980–1995. Pap Reg Sci 88(1):181–207CrossRefGoogle Scholar
  7. Bande R, Karanassou M (2014) Spanish regional unemployment revisited: the role of capital accumulation. Reg Stud 48(11):1863–1883CrossRefGoogle Scholar
  8. Bande R, Fernández M, Montuenga V (2008) Regional unemployment in Spain: disparities, business cycle and wage-setting. Labour Econ 15(5):885–914CrossRefGoogle Scholar
  9. Bentolila S, Jimeno JF (2006) Spanish unemployment: the end of the wild ride?. Structural unemployment in Western Europe: reasons and remedies. MIT Press, Cambridge, LondonGoogle Scholar
  10. Binet ME, Facchini F (2013) Okun’s law in the French regions: a cross-regional comparison. Econ Bull 33(1):420–433Google Scholar
  11. Christiano LJ (1992) Searching for a break in GNP. J Bus Econ Stat 10(3):237–250Google Scholar
  12. Christopoulos D (2004) The relationship between output and unemployment: evidence from Greek regions. Pap Reg Sci 83:611–620CrossRefGoogle Scholar
  13. Clemente J, Montañés A, Reyes M (1998) Testing for a unit root in variables with a double change in the mean. Econ Lett 59(2):175–182CrossRefGoogle Scholar
  14. Congregado E, Golpe A, van Stel AA (2011) Exploring the big jump in the Spanish unemployment rate: evidence on an ‘added-worker’ effect. Econ Model 28(3):1099–1105CrossRefGoogle Scholar
  15. Dixon R, Shepherd D (2013) Regional dimensions of the Australian business cycle. Reg Stud 47:264–281CrossRefGoogle Scholar
  16. Dixon R, Lim GC, van Ours JC (2016) Revisiting Okun’s relationship. IZA Discussion Papers, vol. 9815. IZA, BonnGoogle Scholar
  17. Evans GW (1989) Output and unemployment dynamics in the United States: 1950–1985. J Appl Econom 4:213–237CrossRefGoogle Scholar
  18. Freeman D (2000) A regional test of Okun’s law. Int Adv Econ Res 6:557–570CrossRefGoogle Scholar
  19. De la Fuente A (2012) Series enlazadas de los principales agregados nacionales de la EPA, 1964–2009. Working Papers, vol. 1221. BBVA Bank, Economic Research Department, MadridGoogle Scholar
  20. Galí J, Smets F, Wouters R (2012) Slow recoveries: a structural interpretation. J Money Credit Bank 44(2):9–30CrossRefGoogle Scholar
  21. Glynn J, Perera N, Verma R (2007) Unit root tests and structural breaks: a survey with applications. J Quant Methods Econ Bus Adm 3(1):63–79Google Scholar
  22. Gordon RJ (1984) Unemployment and potential output in the 1980s. Brookings Pap Econ Act 2:537–586CrossRefGoogle Scholar
  23. Herwartz H, Niebuhr A (2011) Growth, unemployment and labour market institutions: evidence from a cross-section of EU regions. Appl Econ 43:4663–4676CrossRefGoogle Scholar
  24. Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econom 115(1):53–74CrossRefGoogle Scholar
  25. Jimeno JF, Bentolila S (1998) Regional unemployment persistence (Spain, 1976–1994). Labour Econ 5(1):25–51CrossRefGoogle Scholar
  26. Knotek E (2007) How useful is Okun’s law? Fed Reserve Bank Kans City Econ Rev Fourth Quart 92(4):73–103Google Scholar
  27. Kosfeld R, Dreger C (2006) Thresholds for employment and unemployment: a spatial analysis of German regional labour markets, 1992–2000. Pap Reg Sci 85(4):523–542CrossRefGoogle Scholar
  28. Lee J (2000) The robustness of Okun’s law: evidence from OECD countries. J Macroecon 22(2):331–356CrossRefGoogle Scholar
  29. Levin A, Lin CF (2002) Unit root test in panel data: asymptotic and finite sample properties. J Econom 118(1):1–24CrossRefGoogle Scholar
  30. Lopez-Bazo E, del Barrio T, Artís M (2002) The regional distribution of Spanish unemployment. A spatial analysis. Pap Reg Sci 81:365–389CrossRefGoogle Scholar
  31. Lopez-Bazo E, del Barrio T, Artís M (2005) Geographical distribution of unemployment in Spain. Reg Stud 39(3):305–318CrossRefGoogle Scholar
  32. Love I, Zicchino L (2006) Financial development and dynamic investment behavior: evidence from panel VAR. Q Rev Econ Finance 46(2):190–210CrossRefGoogle Scholar
  33. López-Bazo E, Motellón E (2013) The regional distribution of unemployment: what do micro-data tell us? Pap Reg Sci 92(2):383–405CrossRefGoogle Scholar
  34. Maddala GS, Wu S (1999) A comparative study of unit root tests with panel data and a new simple test. Oxf B Econ Stat 4:631–652CrossRefGoogle Scholar
  35. Mankiw GN (1994) Macroeconomics. Worth Publishers, New YorkGoogle Scholar
  36. Moon HR, Perron B (2004) Efficient estimation of the seemingly unrelated regression cointegration model and testing for purchasing power parity. Econ Rev 23(4):293–323CrossRefGoogle Scholar
  37. Moosa IA (1997) A cross-country comparison of Okun’s coefficient. J Comp Econ 24:335–356CrossRefGoogle Scholar
  38. Moosa IA (1999) Cyclical output, cyclical unemployment, and Okun’s coefficient. A structural time series approach. Int Rev Econ Financ 8(3):293–304CrossRefGoogle Scholar
  39. Oberst C, Oelgemöller J (2013) Economic growth and regional labor market development in German regions: Okun’s law in a spatial context. FCN Working Paper, vol. 5/2013. RWTH Aachen, AachenGoogle Scholar
  40. Okun AM (1962) Potential GNP: its measurement and significance. Proc Bus Econ Stat Sect Am Stat Assoc 1962:98–104Google Scholar
  41. Österholm P (2004) Killing four unit root birds in the US economy with three panel unit root test stones. Appl Econ Lett 11(4):213–216CrossRefGoogle Scholar
  42. Owyang MT, Sekhposyan T (2012) Okun’s law over the business cycle: was the great recession all that different? Fed Reserve Bank St Louis 94(5):399–418Google Scholar
  43. Palombi S, Perman R, Tavera C (2015a) Commuting effects in Okun’s law among British areas: evidence from spatial panel econometrics. Pap Reg Sci. doi:10.1111/pirs.12166 Google Scholar
  44. Palombi S, Perman R, Tavera C (2015b) Regional growth and unemployment in the medium run: asymmetric cointegrated Okun’s law for UK regions. Appl Econ 47(57):6228–6238CrossRefGoogle Scholar
  45. Perman R, Tavera C (2005) A cross-country analysis of the Okun’s law coefficient convergence in Europe. Appl Econ 37(21):2501–2513CrossRefGoogle Scholar
  46. Perman R, Stephan G, Tavéra C (2015) Okun’s law – a meta-analysis. Manchester Sch 83(1):101–126CrossRefGoogle Scholar
  47. Perron P (1989) The great crash, the oil price shock, and the unit root hypothesis. Econometrica 57(6):1361–1401CrossRefGoogle Scholar
  48. Perron P, Vogelsang TJ (1992) Nonstationarity and level shifts with an application to purchasing power parity. J Bus Econ Stat 10(3):301–320Google Scholar
  49. Pesaran MH (2007) A simple panel unit root test in the presence of cross section dependence. J Appl Economet 22(2):265–312CrossRefGoogle Scholar
  50. Prachowny MFJ (1993) Okun’s law: theoretical foundations and revised estimates. Rev Econ Stat 75(2):331–336CrossRefGoogle Scholar
  51. Pérez JJ, Rodríguez J, Usabiaga C (2002) Análisis dinámico de la relación entre ciclo económico y ciclo del desempleo en Andalucía en comparación con el resto de España, D.T. E2002/07, CentrA, pp 1–29Google Scholar
  52. Robson M (2009) Structural change, specialization and regional labour market performance: evidence for the UK. Appl Econ 41:275–293CrossRefGoogle Scholar
  53. Silvapulle P, Moosa IA, Silvapulle MJ (2004) Asymmetry in Okun’s law. Can J Econ 37(2):353–374CrossRefGoogle Scholar
  54. Sims C (1980) Macroeconomics and reality. Econometrica 48:1–48CrossRefGoogle Scholar
  55. Sögner L, Stiassny A (2002) An analysis on the structural stability of Okun’s law – a cross-country study. Appl Econ 34(14):1775–1787CrossRefGoogle Scholar
  56. Villaverde J, Maza A (2007) Okun’s law in the Spanish regions. Econ Bull 18(5):1–11Google Scholar
  57. Villaverde J, Maza A (2009) The robustness of Okun’s law in Spain, 1980–2004: regional evidence. J Policy Model 31(2):289–297CrossRefGoogle Scholar
  58. Weber CE (1995) Cyclical output, cyclical unemployment and Okun’s coefficient: a new approach. J Appl Economet 10:433–445CrossRefGoogle Scholar
  59. Zivot E, Andrews DWK (1992) Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. J Bus Econ Stat 10(3):251–270Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.AQR-IREAUniversitat de BarcelonaBarcelonaSpain

Personalised recommendations