Do labour market reforms reduce the output growth threshold of Okun’s law? An analysis for OECD countries

Abstract

Reducing unemployment is still a priority for many governments. The objective of this paper is to analyse whether labour market reforms have succeeded in lowering the level of output growth required to reduce unemployment. With this aim, we estimate time-varying thresholds based on a first-difference version of Okun's law for 25 countries and, then we analyse whether 32 labour reforms have contributed to reducing thresholds. The results show a high heterogeneity of thresholds among countries, but also that thresholds have shown a clear decreasing trend, mainly due to the evolution of the labour force and productivity in these countries. We also find that in 21 of the 32 considered labour market reforms, they have been effective in reducing the value of the threshold. Both results are clearly relevant from a policy perspective.