Does Okun's law hold? : a comparative study between Malta and other selected EU countries

Abstract

This dissertation aims to investigate whether the unemployment-output relationship underlined by Okun's Law holds for Malta and other selected EU countries. By estimating different specifications of Okun's Law over the period between 2000 and 2012, this study specifically focuses on analysing any movements that the relationship might have been subject to in the aftermaths of the 2008 financial crisis and the ongoing European sovereign debt crisis. The main conclusion of this study is that while Okun's law is statistically valid for all countries within this study; its magnitude has varied across countries and over time. This latter variation is attributed to both movements over the stages of the business cycle and developments in country-specific labour market features. Specifically, in the case of Malta, evidence founded shows that the responsiveness of unemployment to output has increased significantly in recent years and, in particular, appears to be stronger during recessionary periods.