IMPACT OF ECONOMIC GROWTH ON UNEMPLOYMENT: EVIDENCE ON OKUN’S LAW FROM PAKISTAN

Abstract

This research aims at analyzing the impact of changes in GDP and its
expenditure components on unemployment in order to validate Okun’s Law
in Pakistan. The responsiveness of unemployment rate with respect to
changes in gross domestic product and its expenditure on changes was
examined for Pakistan by using aggregate and disaggregated annual data
from 1971 to 2023. The first difference version of Okun’s Law was applied
on both approaches i.e. aggregate and disaggregated approach to validate
the law. For both versions of the law, we apply ordinary least squares
method (OLS). The estimated results from both approaches confirm the
validity of Okun’s law for Pakistan in the sample period. The main finding
from the disaggregated approach is that the consumption component of GDP
has the largest impact on unemployment in Pakistan. The Okun’s coefficient
for consumption is -2.32 which is significant at 10 percent level. The
government expenditure has the second highest impact on the unemployment
rate after consumption. Based on results from both aggregate and
disaggregated approaches, it is suggested that policy makers in Pakistan
must give especial attention to sustainable economic growth to reduce
unemployment rate in Pakistan. Specifically, they must focus consumption
and government expenditures to enhance levels of employment for the youth
of the country.
________________