Okun’s Law and Long Term Co-Integration Analysis for OECD Countries (1987-2012)

Abstract

Even though, there are so many so long discussions on the relation between population increase and economic growth, today, general opinion tends to believe that there is a direct relation between population increase and economic growth. This opinion is supported by some empirical studies. Despite an economical growth caused by directly with population growth, it is known that there is a reverse relation between unemployment and growth known as Okun's Law. This relation, suggesting that every 1 point decrease in unemployment induces a 3 point increase in growth, is tested for many countries.In this study, this hypothesis of Okun is examined and it is found to be true for selected 23 countries, even with the difference in coefficients. At the same time, long term relation between growth and unemployment is tested with the use of time series analysis and long term relation is found for 14 countries. Additionally, tests done for all 34 OECD countries showed that reversed relation between unemployment and growth is valid and they are co-integrated in long run. In this study, countries are categorized according to growth rate as "low", "normal" and "high" and a consistent unemployment rate for countries with high growth rate could not be seen. In the case of countries with lowest growth rate, generalization that they have quite high unemployment rate can be made. JEL Classification: O40, O57, J64.

Challenges of the Output-Employment Growth Imbalance in Transition Economies

“…They indicate that the relationship between output and unemployment is quite stable over time in most of the analysed countries, whereas the unemployment rate responds more strongly to output in recessions than during expansions. Similar conclusion can be found in Kargi (2016) for all OECD countries over 1987-2012 period. On the other hand, Owyang and Sekhposyan (2012) and Grant (2018) find evidence of substantial time variation of the Okun's coefficient in the United States, especially after the Great Recession of 2008.…”

Are PIIGS so different? An empirical analysis of demand and supply shocks

“…It also should be noted that while estimating the model, some efficiency losses may occur where co-integration between unemployment rate (U) and output (Y) is present. Some authors (see for example, Jean-Claude Trichet 2006; Ho-Chuan Huang and Chih-Chuan Yeh 2013; Mary C. Daly et al 2014 andBilal Kargi 2014) have applied non-stationary panel and time-series methods to the OL. From now on we denote by g the growth rate of output, ∆Y t , and by dU the first difference of the unemployment rate, ∆U t .…”

“…The presence of unit root in the unemployment rate is intimately linked to the hysteresis hypothesis and sometimes results are controversial (Roed 1999; Christian Dreger and Hans-Eggert Reimers 2009; Lang and De Peretti 2009; Ka Ming Cheng et al 2012;De-Chih Liu, Chin-Hwa Sun, and Pei-Chien Lin 2012;Pratik Mitra 2012, 2014;Kargi 2014;Fumitaka Furuoka 2015). Patrick Fève, Pierre-Yves Hénin, and Philippe Jolivaldt ( 2003) have criticised this one-variable test and have proposed a joint restriction test for unemployment and the wage equation.…”