Testing Validity of Okun’s Law for Five Fragile Economies
erhan oruc2019, A New Perspective in Social Sciences
Even though economies creating not enough employment have been examined for a long time, researchers do not reach any consensus about how to solve it out. In the developing countries, under growing world economy theories on jobless growth are being developed since it is not opening new jobs to reduce unemployment rate even if the growth rate of population has been decreased after the World War II. Politicians are also concerned about unemployment since it has a potential threat to the social environment and security in society. Also, it is inevitable to lead not only to decreasing wealth but also increasing psychological problems with unemployed. This may lead to detrimental troubles which are more difficult to figure them out. To avoid these, politicians and economists implement some economic policies to cease to rising unemployment rate or reduce it. It is generally accepted that economic growth results in reducing the rate of unemployment. To reduce unemployment, there will be an increase in production in an economy which causes rising demand for factors of production and since labour is a factor of production so this process leads to increase employment and reducing the rate of unemployment rate. Thus, unemployment decreases in an economy which has a positive growth rate. On the other hand, although many countries have grown by high rate after the 1980s, yet the rate of unemployment has not declined by satisfying amount. Especially, employment rate has become steady or declined in some industry which has registered increased productivity. In that case, unemployment rate may not decrease enough if economic growth is caused by productivity. Okun (1962) pointed out the relation between economic growth and unemployment rate. If economic growth exceeds its potential by 1%, then unemployment rate goes down by 0.5%. Later, this relation is called Okun’s Law. After the 1980s, one of the resources of economic growth was productivity, especially in developing countries. Due to the increase in productivity, the employment rate remained as before or could decrease even if the countries’ economies grew. Moreover, the growth rate of the population was high which led to decrease employment rate or less than economic growth performance. The aim of this paper is that investigate Okun’s law for five fragile economies: Brazil, Indonesia, India, South Africa and Turkey. This paper is organised as follows. Section 1 describes basic theoretical background of Okun’s Law. In Section 2, the paths for growth rate and unemployment rate from 1990 to 2017 for five fragile countries are discussed. Then, some empirical examples for five fragile economies will be presented in section 3. In the following part, data and economic models will be discussed. The results of applications are reported in Section 5. Finally, Section 6 makes concluding remarks.
