The link between unemployment and real economic growth in developed countries

TL;DR

This study revisits the link between unemployment and economic growth in developed countries, confirming a strong predictive relationship and the absence of structural unemployment, using updated data and refined models.

Contribution

It introduces a piecewise linear model of unemployment change based on real GDP per capita variations, accounting for definitional revisions and measurement errors.

Findings

High coefficients of determination (R2=0.866 to 0.977) confirm the strong link.

The model accurately predicts unemployment rate changes from economic growth.

Measurement errors likely influence residual discrepancies.

Abstract

Ten years ago we presented a modified version of Okun law for the biggest developed economies and reported its excellent predictive power. In this study, we revisit the original models using the estimates of real GDP per capita and unemployment rate between 2010 and 2019. The initial results show that the change in unemployment rate can be accurately predicted by variations in the rate of real economic growth. There is a discrete version of the model which is represented by a piece wise linear dependence of the annual increment in unemployment rate on the annual rate of change in real GDP per capita. The lengths of the country-dependent time segments are defined by breaks in the GDP measurement units associated with definitional revisions to the nominal GDP and GDP deflator (dGDP). The difference between the CPI and dGDP indices since the beginning of measurements reveals the years of such breaks. Statistically, the link between the studied variables in the revised models is characterized by the coefficient of determination in the range from R2=0.866 (Australia) to R2=0.977 (France). The residual errors can be likely associated with the measurement errors, e.g. the estimates of real GDP per capita from various sources differ by tens of percent. The obtained results confirm the original finding on the absence of structural unemployment in the studied developed countries.