Introduction

There are various macroeconomic variables which economists consider and analyse to establish relationships. Such variables include the GDP growth rates (Gross Domestic Product), unemployment rates in the economy, inflation rates, exchange rates, interest rates and such variables which impact the economy as a whole. While the Philips curve analyses the relationship between the inflation rate and the unemployment rate, Okunâ€™s law studies the relationship between the output growth rate and also the unemployment rate in the economy. Okunâ€™s relationship is much simpler explained than the Philips curve relationship as it says that there is a positive association between output and employment levels in the economy and this is because when there is more output that is produced in the economy, it is produced using more labour in the economy and as a result of this increase in output there is a increase in employment. One can also alternatively associate an negative relationship between unemployment rate and output growth rate. GDP growth rate in the economy is also associated with changing contributions from various sectors namely the agricultural sector, manufacturing sector and also the services sector. This research focuses on analysing the Okunâ€™s relationship between the unemployment and output growth rates and also disintegrates the relationship with various sectoral contributions to find whether there is any association between the two.

Okunâ€™s Law: Literature review:

Economists consider two main macroeconomic variables when considering growth of an economy and these include the economic growth measured by the GDP of the economy and also the unemployment rates. The statistical relationship between these two variables is popularly known as Okunâ€™s Law. Basically, it says that the GDP of a country should grow at about 4% annually to reduce the unemployment rate by 1%. The logic behind the Okunâ€™s law is very simple â€“ it goes like this â€“ As output of the economy is dependent on the labour used in the production process, there is a direct relationship between the labour employed (which amounts to employment) and the output products. This implies that when output of the economy increases, the unemployment level in the economy decreases (there is a indirect or negative relationship between the output level and unemployment level in the economy).

The empirical studies on Okunâ€™s law highlights the fact that its successful fit to various developed and developing countries are different. One paper which compares the output and short run unemployment data in the US since the year 1948 and for twenty years in other advanced economies proves out that the law holds good and strong in most of the advanced economies with only the coefficient of the relationship (which signified the impact of 1% change in (GDP) output on the unemployment rate) differs substantially between these countries(Ball, Leigh and Loungani, 2017). Despite the fact that many economists are questioning the stability of the Okunâ€™s Law and also have published about the demise of the Okunâ€™s law, there is strong theoretical evidence that shifts in the aggregate demand in the economy to the right would cause positive change in output which would make the companies to hire workers and hence reduce the unemployment level. And when the aggregate demand shifts to the left during the recessionary period, there could be decrease in output levels causing unemployment levels to increase. However the economists who question the Okunâ€™s law stress that the validity or stability of the Okunâ€™s law becomes unstable when there are a host of labour marker problems (mismatch between the jobs and the number of workers) which is impacted by policies in the labour market like job training and this acts as a key in reducing unemployment in the economy rather than just the adjustments in the aggregate demand as advocated by Okunâ€™s law. However, the US data analysed in this article demonstrates a good fit of the Okunâ€™s law relationships with output growth increasing more slowly during the recent recessionary trends than it was before 1990s. The data analysed during the period of 2008 â€“ 2009 suggests the fact that there are cross -country differences in the coefficients of Okunâ€™s law across countries and is also dependent on the recessionsâ€™ length in these countries. The conclusion of this important paper on the empirical analysis of Okunâ€™s law is that though Okunâ€™s law is not as universal as gravity law, it is stable and strong with certain deviations which are exaggerated often(Ball, Leigh and Loungani, 2017).

Another paper seeks to analyse the Okunâ€™s law validity for 13 developed countries over the period 1970 to 2013(Rahman and Mustafa, 2015). The countries for which the validity is tested include the United States, Germany, South Korea, Canada, Japan, Finland, France, New Zealand, The Netherlands, United Kingdom, Sweden, Germany and Australia. This paper lays out the fact that Okunâ€™s law is prone to revisions in changing economies. It changes with the business cycles and hence have various alternative versions which include the gap version, the difference version, the production function version and the dynamic version. This paper analyses the production function version of Okunâ€™s law which combines all the idle resources of the economy where the production function represents a combination of labour, technology and capital which together produce the output which is combined with the gap based version of Okunâ€™s law which suggests that the unemployment level is connected to the gap between the potential and actual output in the economy. Based on the log-linear form regression results, this paper concludes that for USA and South Korea, Okunâ€™s law holds good though there are degrees of variability. In the case of Germany, there is no validity proved for Okunâ€™s law. And for the other countries mentioned ( Canada, Japan, Finland, Italy, France, The Netherlands, UK, New Zealand and Australia) the Okunâ€™s relationship between unemployment rate (Stock-Watson dynamic OLS (DOLS)) and real GDP growth is weakly valid. The implications of this research suggests that while USA and south Korea are expected to succeed with policies which enhance real GDP growth rate as it would likely reduce the unemployment in the economy and can thus focus on expansionary fiscal and monetary policies(Rahman and Mustafa, 2015). For Germany, it has to make alterations to its labor market policies which can make it more flexible for practicing such policies. Other countries mentioned would have moderate probability of success with such expansionary fiscal and monetary policies as the relationship (based on Okunâ€™s law) proves to be weaker.

Another article which focuses on job creation at the private sector explores the patterns and determinants of employment at macro level, sector level and also at the firm levels. In different countries, the private sector seems to respond differently to GDP growth or decline (Farole, Ferro and Gutierrez, 2017).

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