Post-recession US Employment through the Lens of a Non-linear Okun's law
This paper aims at investigating the relationship between employment and GDP in the United States. We disentangle trend and cyclical employment components by estimating a non-linear Okun's law based on a smooth transition error-correction model that simultaneously accounts for long-term relationships between growth and employment and short-run instability over the business cycle. Our findings based on out-of-sample conditional forecasts show that, since the exit of the 2008-09 recession, US employment is on average around 1% below the level implied by the long run output-employment relationship, meaning that about 1.2 million of the trend employment loss cannot be attributed to the identified cyclical factors.
We would like to thank Anindya Banerjee, Nicolas Coeurdacier, Dick van Dijk, James D. Hamilton, Matthieu Lemoine, Herve Le Bihan, Antonia Lopez-Villavicencio, and Anne Peguin-Feissolle for helpful comments and remarks on a first draft of this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the Banque de France or the National Bureau of Economic Research.