Paul Deng: The authors use Chinese provincial data from 1997 to 2006 to empirically test the relationship between local unemployment and GDP growth. They find, in general, that the data conform to Okun's law—namely, when the unemployment rate rises, GDP growth slows. The exception lies in western China, where the link between the two turned positive, or became insignificant (see Table 2).
Partly motivated by this empirical puzzle, the authors attempt to explain this regional disparity. They borrow a theoretical framework by Aghion and Blanchard (1994) (AB model, hereafter), which was originally set up to model the disparity in the speed of transition among the former communist countries of Eastern Europe. The model offers insight that the speed of transition can be determined by the unemployment rate. Initially, higher unemployment helps the speed of transition, mainly because the emerging private sector can hire from the labor pool as state sectors...