Regional Differences in Okun’s Law and Explanatory Factors: Some Insights From Europe

Okun’s law is one of the best-known stylized facts in the economic literature, as well as one of the most widely used policy tools. The aim of this paper, which utilizes a comprehensive sample of 265 European regions by using annual observations covering the period from 2000 to 2019, is to deepen our knowledge of Okun’s law from two perspectives: on one hand, by checking the existence and intensity of regional differences, and on the other hand, by assessing the factors that explain them. To this end, in the first part, we apply a heterogeneous panel approach that deals with cross-sectional dependence, which allows us to obtain an average coefficient as well as region-specific coefficients. In the second part, a cross-sectional spatial model is used to uncover explanatory factors. Our findings reveal quite remarkable regional differences, as well as a somewhat geographical pattern in them. Moreover, they point out the importance of demographic factors (such as gender and age), labor market variables (share of employment in industry and construction, as well as self-employment and part-time employment and the severity of long-term unemployment), R&D expenditure, and some national institutional factors when it comes to explaining differences across regions.