Okun’s Law in Peru Asymmetric Effect over Time for Unemployment and Underemploymen

This study explores the hypothesis that economic growth, measured as the growth rate of a country’s Gross Domestic Product (GDP), is associated with a reduction in unemploy ment. This relationship was originally proposed by Okun (1962), who introduced three alternative estimation approaches that later became collectively known as Okun’s Law. The analysis is conducted using the first of these approaches and annual data for Peru from 1970 to 2023. Given Peru’s high levels of underemployment and labor informality, the study extends the traditional framework by incorporating the concept of “expanded unemployment”, defined as the sum of unemployment and underemployment. To account for potential nonlinearities and regime-dependent dynamics, a Markov Switching Vector Autoregressive (MS-VAR) model is employed, in which regime changes are stochastic and determined by an unobservable latent state. The probabilistic process governing regime transitions is estimated from the data through estimated transition probabilities. In addition to output growth, the model incorporates productivity, investment, and public expenditure as explanatory variables. The results indicate that gdp growth has a stron ger effect on reducing expanded unemployment than on unemployment, suggesting that economic growth facilitates the transition from underemployment to adequate employ ment. Furthermore, the sensitivity of unemployment to output fluctuations is found to be greater during recessions than during expansions, implying that output contractions destroy jobs more intensively than output expansions create them.