INVESTIGATING OKUN’S LAW IN SAARC COUNTRIES: AN ARDL APPROACH

Year 2021, Volume: 12 Issue: 1, 1 - 18, 30.06.2021

Abu Hanif Zobayer Ahmed Savaş Çevik

Abstract

Keywords

ARDL, economic growth, Okun's Law, SARC, unemployment rate

INVESTIGATING OKUN’S LAW IN SAARC COUNTRIES: AN ARDL APPROACH

Abstract

Abstract: The aim of this paper is to test the applicability of Okun’s law in SAARC (South Asian Association for Regional Cooperation) countries. It also intends to find the long-run association between unemployment rate and growth rate and investigate the impact of growth rate on unemployment in the South Asian Region. The study uses annual time series data for eight SAARC countries, from 1991 to 2017. To meet the objectives of the research, the graphical illustration of trend with descriptive statistics are followed by econometric analysis. Based on the stationarity of the variables, an autoregressive distributive lag (ARDL) model has been estimated to test the long-run relationship between unemployment and growth. The results indicate that per capita GDP negatively influences the unemployment rate in the long run only in three member countries of SAARC, namely- Afghanistan, India and Sri Lanka and in the South Asian Region in aggregate. This paper also finds a negative relationship between the growth rate and unemployment rate in Bangladesh, but this association is not statistically significant. The study doesn’t find any negative relationship between the two variables in Bhutan, Maldives, Nepal and Pakistan. The study discovers the validity of Okun’s law, but the attained Okun coefficient is less than that of the actual Okun coefficient, documented by Arthur Okun. Another substantial evidence is that the significance of the connection between the growth rate and unemployment rate varies among the SAARC countries. The main limitation of this paper is the unavailability of data for Afghanistan compared to other SAARC countries. This paper is unique as it tests the validity of Okun’s law in every member country of SAARC and as a region of South Asia. To date, no such study like this has been found in the body of literature which finds long-run relationship in all SAARC countries.

Keywords

ARDL, economic growth, unemployment rate, SAARC, Okun's Law

References

• Adenutsi, D. E. (2010), "Do international remittances promote human development in poor countries? Empirical evidence from Sub-Saharan Africa", https://mpra.ub.uni-muenchen.de/29347/, Retrieved: 20.01.2021.
• Ahmed, A., Aziz, A., & Zaman, K. (2013), "The Long Run Effects between Unemployment and Economic Growth in Selected SAARC Countries", Economic Research Guardian, 3(2): 70.
• Al-Habees, M. A., & Rumman, M. A. (2012), "The relationship between unemployment and economic growth in Jordan and some Arab countries", World Applied Sciences Journal, 18(5): 673-680.
• Anyanwu, J. C. (2014), "Factors Affecting Economic Growth in Africa: Are There any Lessons from China?", African Development Review, 26(3): 468-493. doi:10.1111/1467-8268.12105
• Aranki, T., Friberg, K., & Sjödin, M. (2010a), "The relationship between the business cycle and the labour market in Sweden. Economic Commentaries, 10.
• Aranki, T., Friberg, K., & Sjödin, M. (2010b), "The relationship between the business cycle and the labour market in Sweden", Economic Commentaries. Online available at: http://www. riksbank. com/upload/Dokument_riksbank/Kat_publicerat/ Ekonomiska% 20kommentarer/20, 10.
• Arnold, R. A. (2011), Principles of economics: South-Western, Cengage Learning.
• Chauhan, C. (2008), "Higher Education: Current Status and Future Possibilities in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka", Analytical Reports in International Education, 2(1): 29-48.
• Christopoulos, D. K. (2004), The relationship between output and unemployment: Evidence from Greek regions, Papers in Regional Science, 83(3): 611-620. Ciprian-Ionel, T. (2007), "Okun's Law for Romania during 1992-2004", https://mpra.ub.uni-muenchen.de/10638/1/Okuns_ LAW_ROMANIA_1993_ 2004.pdf, Retreived: 20.01.2021.
• Gujarati, D. N. (2009), Basic econometrics: Tata McGraw-Hill Education.
• Higgins, P. (2011), "GDP Growth, the Unemployment Rate and Okun’s Law", Econ South, 02-03.
• Hussain, T., Siddiqi, M., & Iqbal, A. (2010), "A coherent relationship between economic growth and unemployment: An empirical evidence from Pakistan", International Journal of Human and Social Sciences, 5(5): 332-339.
• Hussain, T., Siddiqi, M., & Iqbal, A. (2010), A Coherent Relationship between Economic Growth and Unemployment: An Empirical Evidence from Pakistan, https://publications.waset.org/14244/a-coherent-relationship-between-economic growth-and-unemployment-an-empirical-evidence-from-pakistan, Rterieved: 02.01.2020.