Okun's Law Does the Austrian unemployment–GDP relationship exhibit structural breaks?

Abstract.

Okun's Law postulates an inverse relationship between movements of the unemployment rate and the real gross domestic product (GDP). Initial empirical estimates for US data indicate that a two to three percent GDP growth rate above the natural or average GDP growth rate causes unemployment to decrease by one percentage point and vice versa. In this investigation we check whether this postulated relationship exhibits structural breaks by means of Markov-Chain Monte Carlo methods. We estimate a regression model, where the parameters are allowed to switch between different states and the switching process is Markov. As a by-product we derive an estimate of the current state within the periods considered. Using quarterly Austrian data on unemployment and real GDP from 1977 to 1995 we infer only one state, i.e. there are no structural breaks. The estimated parameters demand for an excess GDP growth rate of 4.16% to decrease unemployment by 1 percentage point. Since only one state is inferred, we conclude that the Austrian economy exhibits a stable relationship between unemployment and GDP growth.