The Dynamics of Economic Growth and Unemployment

This chapter analyses a vector error correction model of economic growth and unemployment in four major European economies — France, Germany, Italy and the United Kingdom. We find that unemployment and economic growth are cointegrated, and driven by the same autoregressive unit root present in most endogenous growth models. In the long run, economic growth and unemployment are positively correlated, as suggested by recent economic theories on endogenous growth and unemployment. In the short run, an increase in the equilibrium unemployment rate leads to a decline in economic growth rates. The short-run dynamics of economic growth and unemployment therefore remain consistent with Okun’s law. Okun’s coefficient is in line with previous estimates for all countries except in the case of the United Kingdom, whose labor market appears to be much more flexible in accommodating adverse transitory shocks than continental labor markets. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.