Unemployment entry, exit and Okun’s law: An analysis with Australian data

Abstract

This paper sets out a new approach to understanding Okun’s law and the evolution of the unemployment rate in Australia. Okun’s law can be expressed in terms of a relationship between first differences in the unemployment rate and the growth rate of real GDP while changes in the unemployment rate in turn can be expressed in terms of flows into and out of unemployment. Having established that Australian data is consistent with the ‘change’ version of Okun’s Law we then examine the unemployment entry and exit rates to determine the extent to which the variations in one or both of these rates can be explained by variations in GDP growth. It would appear that the asymmetry in the relationship reflects a greater impact of changes in GDP growth on the entry rate and not the exit rate