Self-employment and Okun’s Law relationship: the Spanish case

The present research provides evidence on the determinants driving the differences in the unemployment-output relationship in Spanish regions. We followed a two-step approach. First, we estimated a set of time-varying Okun’s coefficients (rolling-window) for the autonomous communities in Spain (1981-2013) showing significant regional differences as well as important changes over time. At the second step, we estimated FMOLS and DOLS models to explain regional differences in Okun’s law. The results obtained lead to the conclusion that differences in the weight of self-employment and its variations over time prove relevant when accounting for differences in Okun’s law between Spanish regions, and its effect (in standard deviations) is greater than that of variations in labour productivity per worker, which so far had been considered the main driver of regional discrepancies. The economic policy implications of this outcome are huge due to the fact that Spanish regional and national authorities are promoting self-employment.