EMPLOYMENT Working Paper No. 252

Literature Review of Empirical Studies on Okun’s Law in Latin America and the Caribbean

The purpose of this literature review is to highlight the results of recent research about the validity of Okun’s law for developing countries, in particular for Latin America, and its quantitative importance. Moreover, it tries to summarize the factors that have been called as possible explanations for the “lower” responsiveness of unemployment to output growth usually observed in developing countries with respect to the benchmark given by the US.

The review is organized as follows:
Section 2: contains a methodological reminder that summarizes the different methods and estimation techniques adopted in the papers.
Section 3: reviews the evidence for developed and developing countries. Section 4 focuses on the research conducted on LAC countries.
Sections 5 and 6: review the explanatory factors that have been proposed as driving the different estimates of Okun’s law, considering some of the potential sources of heterogeneity that are hidden behind the apparently simple Okun’s law.
Section 7: concludes.