Abstract

Unemployment is one of the major economic problems of countries and its decline is always the focus of researchers and policymakers. Okun found a negative relationship between production and unemployment. Since then, there have been many studies about how unemployment affects production within Okun's law framework; but the results vary in different countries and at different times (boom or recession). Since the results are accompanied by distinct policy implications, a reexamination of this empirical law using a new econometric method seems necessary. This study, using the Markov switching approach, examines the validity of Okun's law from the asymmetry perspective across the regimes based on Iran’s data 2018:1-1978:1. The results show that the effect of unemployment on production is asymmetric and nonlinear; so that changes in unemployment do not affect production gap during the boom, but during the recession, positive and negative shocks have a significant effect on the production gap. That is, the reduction in unemployment will more severely affect the production gap in a recession.