The Unemployment-Output Tradeoff in Transition Economies: Does Okun's Law Apply?

This paper investigates whether an Okun-type relationship between output and unemployment is taking hold in formerly planned economies as they move towards the market. Using a first-differences variant of Okun's Law, we test for its presence in 25 transition countries divided into groups of "reform leaders" and "reform laggards." For leaders, represented by the 10 European Union (EU) accession countries, Okun's Law is detected in both 1991-94 and 1995-2000 periods. For laggards, represented by the remaining group, it is present only for the later period and only when countries affected by wars are removed from the sample. A comparison of unemployment-output elasticities and unemployment levels in EU candidates and EU members themselves indicates that their labor markets might be converging. Copyright 2002 by Kluwer Academic Publishers