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Asymmetry in the Unemployment–Output Relationship Over the Business Cycle: Evidence from Transition Economies

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Abstract

This study examines the presence of asymmetry in Okun's law for nine transition economies by means of a Markov regime-switching model. We examine the relationship between unemployment and real GDP to ascertain whether such changes are substantially different in downswing versus upswing regimes. The nonlinear model outperforms the linear model in all transition economies in the sample except for Slovenia. There is evidence that the Okun coefficients vary across regimes and countries. In most countries, cyclical unemployment is more sensitive to cyclical output in downswing regimzes than upswing regimes. We also find recoveries entail poor job growth in most transition economies.

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Notes

  1. We thank Josef Brada for pointing out the possibility of a secular trend in unemployment during transition.

  2. The identification of regimes is an important issue within a Markov regime-switching framework. Studies on Okun's law generally identify the regimes as ‘expansion’ and ‘contraction’ (Harris and Silverstone, 2001; Huang and Chang, 2005; Holmes and Silverstone, 2006). Malley and Molana (2008) identify the regimes as ‘high effort’ in which the unemployment rate is above the natural rate and ‘low effort’ in which unemployment rate is under the natural rate. Harris and Silverstone (2001) label the regimes as ‘upturn in business cycle’ and ‘downturn in business cycle’. While examining the asymmetric nature of the output–unemployment relationship, Silvapulle et al. (2004) use the upswing /downswing terminology. We follow suit and identify the regimes as ‘upswing in the economy’ and ‘downswing in the economy’, respectively.

  3. Although a large number of studies examines linearity in the literature, these studies have computational difficulties; see, for example, Hansen (1992), Garcia (1998) and Cho and White (2007). Therefore, several studies in the literature use the LR test to compare results of the linear and the regime-switching model.

  4. We use a Wald test to determine whether Okun coefficients are statistically different across regimes for all countries. We can reject the null hypothesis that Okun coefficients are statistically equal across regimes at the 5% level for the Czech Republic, Hungary, Latvia and Russia. The test results are available upon request.

  5. Onaran (2008) finds positive but low output elasticity of labor demand in Central and Eastern Europe with a number of cases where employment is completely detached from output. Boeri and Garibaldi (2006) found that the elasticity of employment with respect to output growth is 0.1 in Eastern European members of the EU, way below the Eurozone.

  6. Strictly speaking, the unemployment rate might be falling when the economy experiences job losses. Moreover, unemployment can remain high when the economy adds jobs as labor market adjustments can take other forms such as migration, changes in labor force participation and transitions between the ‘grey economy’ and the ‘formal economy’ where workers are afforded legal protections.

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Acknowledgements

We thank the editor, Josef Brada, and two anonymous referees for comments that led to significant improvements in the article. We are solely responsible for any remaining errors.

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Authors and Affiliations

  1. Department of Econometrics, Bulent Ecevit University, Zonguldak, 67100, Turkey

    Emrah Ismail Cevik

  2. Department of Economics, University of Missouri St Louis, 408 SSB, One University Blvd, St Louis, MO 63121, USA

    Sel Dibooglu

  3. Department of Economics, Gaziosmanpaşa University, Tokat, 60150, Turkey

    Salih Barişik

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Cevik, E., Dibooglu, S. & Barişik, S. Asymmetry in the Unemployment–Output Relationship Over the Business Cycle: Evidence from Transition Economies. Comp Econ Stud 55, 557–581 (2013). https://doi.org/10.1057/ces.2013.7

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