The Variability of the Okun Coefficient.

In this paper we use a highly simplified model to examine the variability of the Okun coefficient. The model incorporates the major behavioral characteristics which have been used to explain potential output. Based on a derived expression for the coefficient, we calculate annual estimates of it for the U.S. economy since 1954 and delineate the importance of the major behavioral characteristics of the model which explain its variability over time.
In this paper we demonstrate the variability of the Okun coefficient over time and evaluate the major factors in potential output models which influence the magnitude of the coefficient and its variability. Our results support the hypothesis that changes in labor productivity are the single most important factor influencing the magnitude and variability of the coefficient with direct changes in employment, induced changes in average weekly hours, and induced changes in labor force participation rates following in decreasing order of importance.
Assuming the model and the estimates of the structural parameters employed in the simulation exercises are reasonable for the economy during the period under investigation, the study provides useful insights into both the usefulness of the Okun coefficient as a basis for economic policy and the relative importance of the factors which influence its magnitude and variability. The conclusions reached are necessarily tentative, as would be the case for any study of this type. However, the approach indicates that while the Okun coefficient may remain a useful tool for estimating potential output and predicting the unemployment rate, the factors influencing its variability must be taken into account when it is used in formulating economic policy. [ABSTRACT FROM AUTHOR]