The Demise of Okun's Law and of Procyclical Fluctuations in Conventional and Unconventional Measures of Productivity

Abstract

participants for helpful comments at presentations of earlier versions of this paper at the Federal Reserve Bank of San Francisco and at the Atlanta AEA meetings. Thanks also go to Bob Hall for flagging the existence of a BLS series on aggregate labor hours based on the household survey. A drastically shortened summary of an earlier version of this paper appeared under the title “Okun’s Law and Productivity Innovations, ” American Economic Review Papers and The point of departure is Okun’s Law, a rough prediction that a cyclical deviation of output from trend would be divided between a 2/3 response of aggregate hours and a 1/3 response of productivity. The main conclusion of the paper is that the procyclical productivity response of Okun’s Law is obsolete in U. S. data since the mid‐1980s. These results cast doubt not only on Okun’s original law, but on the convention in modern macro theory of assuming that unexplained procyclical productivity shocks drive part or all of business cycle fluctuations. A definitional identity links output, productivity, aggregate hours, and the employment rate. The paper decomposes data on the components of the output identity into trends and deviations from trends, or “gaps”. Its regression analysis reveals regular features of postwar

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