The Validity of Okun’s Coefficient in Pakistan: A Time Series Analysis

Full Article - PDF

Published: 2020-11-03

Page: 258-276


Farah Arif *

Department of Economics, Shaheed Benazir Bhutto Women University, Peshawar, Pakistan.

*Author to whom correspondence should be addressed.


Abstract

The output – unemployment relationship was postulated by Arthur Okun in the beginning of 1960’s, known as Okun’s law. This study specifically contributes to the literature in Pakistan by estimating the production function version of Okun’s law using annual time series data over the period of 1973 to 2017 and generally helps in selecting a suitable test method for time series data. Linear regression and time series predictive models are used for the analysis to compare their predictive ability and analyze their performance to choose the best. The performance analysis shows that the time series forecasting model provides more efficient results as compared to the linear regression model. The empirical evidence suggests that Okun’s law holds its validity in the long run as well as in the short run in Pakistan. Thus, a decrease in economic output could lead to increase in unemployment, but unemployment has a less impact on real gross domestic product (GDP) for the case of Pakistan as compared to Okun’s coefficient benchmark.

Keywords: Okun’s law, Pakistan, real gross domestic product (GDP), unemployment rate, capacity utilization, capital formation, total labor force.


How to Cite

Arif, F. (2020). The Validity of Okun’s Coefficient in Pakistan: A Time Series Analysis. Asian Journal of Economics, Finance and Management, 2(1), 258–276. Retrieved from https://globalpresshub.com/index.php/AJEFM/article/view/891

Downloads

Download data is not yet available.

References

Knotek ESII. How useful is Okun's law?” Economic Review. 2007;92(4):73- 103.

Dixon R, Lim GC, Jan Van Ours C. Revisiting the Okun relationship. Applied Economics. 2016;49(28):2749-2765. DOI: 10.1080/00036846.2016.1245846

Owyang MT, Sekhposyan T. Okun’s Law of the business cycle: was the Great Recession all that different? Federal Reserve Bank of St. Louis Review. 2012;94(5):399-418.

Cazes S, Verick S, Hussmi FA. Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun’s Law. IZA Journal of Labor Policy. 2013;2:1-18.

Ball L. What determines the sacrifice ratio?” NBER Working Paper 4306. National Bureau of Economic Research, Inc; 1993.

Boussemart JP, Briec W, Perman R, Tavera C. Nonlinear version of Okun’s law United Kingdom: How do technical change and technological distance influence the size of Okun’s law coefficient?” Strathclyde Discussion Papers in Economics; 2012.

Perman R, Stephan G, Tavera C. Okun’s law – A meta-analysis. Manchester School. 2015;83(1):101-126.

Okun AM. Potential GNP: Its Measurement and Significance. American Statistical Association, Proceedings of the Business and Economics Statistics Section. 1962;98-104:1962.

Samuelson P, Nordhaus W. Economics, 15th ed. New York, NY: McGraw-Hill, Inc; 1995.

Blackley PR. The Measurement and determinants of Okun's law: Evidence from State Economies. Journal of Macroeconomics. 1991;13(4):641-656.

Prachowny MFJ. Okun‘s Law: Theoretical foundations and revised estimates. The Review of Economics and Statistics. 1993;75(2):331-336. [Online]. Available: Doi: 10.2307/2109440

Adanu K. A cross-province comparison of okun’s coefficient for Canada. Applied Economics. 2005;37(5):561–70, 2005. [Online]. Available: Doi: org/10.1080/0003684042000201848

Christopoulos D. The relationship between output and unemployment: evidence from greek regions. Papers in Regional Science. 2004;83(3):611-620.

Arshad Z. The validity of okun’s law in swedish economy. Unpublished Master’s thesis, Stockholm University, Sweden; 2007.

Daly CM, Fernald JG, Jorda O, Nechio F. Output and unemployment dynamics. Working Paper. Federal Reserve Bank of San Francisco; 2015.

Kreishan F. Economic Growth and Unemployment: An empirical analysis. Journal of Social Sciences. 2011;7(2):228-231.

Lam JJ. The applicability of Okun’s relationship between unemployment and GDP Growth in the Philippines,” unpublished Master’s thesis, De La Salle University, Philippine; 2014.

Liu X, Lam R, Schipke A, Shen G. A generalized Okun's Law: Uncovering the myth of China's labor market resilience. Review of Development Economics. 2018;22(3):1195-1216. [Online]. DOI: org/10.1111/rode.12379

Esmeraldo X, Veton K. Estimating Okun's Law for Albania (1993-2017). Unpublished Master’s thesis, Department of Economic Science, Aleksander Moisiu Durres University; 2019.

Javed U. Validity of Okun’s law Empirical evidence from Pakistan. Unpublished Master’s thesis, Sodertorn University, Sweden; 2010.

Khan AM, Mian SA, Anwar A, Saboor A. Modeling the relationship between GDP and unemployment for Okun’s law specific to Pakistan during 1976-2010. Theoretical and Applied Economics. 2010;10(587):71-78, 2013.

Ahmed K, Khalil S, Saeed A. Does there exist okun’s law in Pakistan? International Journal of Humanities and Social Science. 2011;1(12):293–99.

Batavia AR, Abdussalam M. Relationship between Unemployment and Gross Domestic Product: Evidence from Pakistan using Okun's Law. Journal of Independent Studies and Research. 2012;10(1):149-157.

Akram M, Hussain S, Raza S, Masood S. An empirical estimation of Okun’S law in context of Pakistan. Journal of Finance and Economics. 2014;2(5):173-177. DOI: 10.12691/jfe-2-5-7

Corrado C, Mattey J. Capacity utilization. Journal of Economic Perspectives. 1997;11(1):151-167.

Khan TM. Capital formation in Pakistan. Review of Income and Wealth. 1963;1:261-270. [Online]. DOI: 10.1111/j.1475-4991.1965.tb01030.x

Hussain A. Unemployment threat in Pakistan. The Financial Daily; 2018. [Online]. Available: https://thefinancialdaily.com/unemployment-threat-pak/

Hodrick R, Prescott EC. Postwar U.S. Business Cycles: An empirical investigation. Journal of Money, Credit, and Banking. 1997;29(1):1-16. [Online]. Doi: JSTOR 2953682

Gujarati D, Porter D. Basic Econometrics, New York: McGraw-Hill/Irwin; 2009.

Philips PCB, Perron P. Testing for a unit root in time series regression. Biometrika. 1998;75(2):335–346. [Online]. DOI: ORG/10.1093/BIOMET/75.2.335

Pesaran MH, Shin Y, Smith RJ. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics. 2001;16(3):289-326.

Siddiqui S. Contrary to slogan of job creation, unemployment on the rise in Pakistan. The Express Tribune; 2019. [Online]. Available:https://tribune.com.pk/story/2088407/2-contrary-slogan-job-creation-unemployment-rise-pakistan