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Revisiting Output Employment Relationship in Pakistan: An Empirical Investigation of Okun’s Law Using Rolling Regression

Introduction

Revisiting output employment relationship in pakistan: an empirical investigation of okun’s law using rolling regression. Explore Okun's Law in Pakistan (1991-2023) using rolling regression. Reveals inconsistent relationship between GDP growth and unemployment, suggesting new policies beyond economic growth.

Abstract

Economists have proven the negative relationship between GDP growth in the economy and the unemployment rate changes over time. This study uses the empirical application of Okun’s Law using time varying coefficients to test the relationship between economic growth and rate of unemployment over time. The study used time series data for the period from 1991 to 2023 from Pakistan, which was sourced from World Bank. In empirical analysis, the augmented dickey fuller test is employed to assess the unit root of the variables. Based on unit root results, Autoregressive Distributed Lag (ARDL) bounds testing approach followed by Error Correction Model (ECM) utilized to investigate short term and long-term significance of Okun’s law in Pakistan. The Okun’s law with time varying effects are estimated using the rolling regression approach. The ECM results demonstrates that there is a significant and negative relationship between GDP growth and unemployment in Pakistan in the long run, but the time varying coefficients reveals that Okun’s Law is not consistent over the analysis period. This work contributing to the corpus of knowledge in Pakistan by estimating Okun’s law using rolling regression. According to the study’s results, the Okun’s law in Pakistan is not stable over the study period. There is a need to develop employment generating policies other than only focusing to economic growth. The policy intuitions can consider FDI, Trade Openness, and financial development as key indicators for reducing unemployment in Pakistan.

Review

The study "Revisiting Output Employment Relationship in Pakistan: An Empirical Investigation of Okun’s Law Using Rolling Regression" addresses a highly relevant and well-established economic relationship, Okun's Law, within the specific context of Pakistan. The paper's strength lies in its sophisticated methodological approach, employing both the Autoregressive Distributed Lag (ARDL) bounds testing approach with an Error Correction Model (ECM) for long-run and short-run dynamics, and crucially, rolling regression to estimate time-varying coefficients. This combination allows for a much more nuanced examination of Okun's Law than traditional static models, making a significant methodological contribution to the literature on this topic, particularly for a developing economy like Pakistan. The use of data from 1991-2023 provides a substantial time series for analysis. The core findings are compelling and provide critical insights. While the ECM results confirm a significant negative long-run relationship between GDP growth and unemployment, consistent with conventional Okun's Law, the rolling regression analysis reveals a crucial instability: Okun’s Law is "not consistent over the analysis period." This dynamic nature, uncovered by the time-varying coefficients, is the paper's most salient empirical contribution. It challenges the assumption of a stable relationship and underscores the importance of context-specific and time-sensitive policy formulations. The demonstration that the output-employment relationship is not static over three decades in Pakistan adds valuable depth to the understanding of labor market dynamics in developing countries. The study effectively translates its empirical findings into pertinent policy recommendations. The conclusion that "there is a need to develop employment generating policies other than only focusing to economic growth" is a direct and impactful consequence of the identified instability of Okun's Law. By suggesting indicators such as FDI, Trade Openness, and financial development as potential drivers for reducing unemployment, the authors provide actionable insights for policymakers in Pakistan. This work undoubtedly contributes to the corpus of knowledge by offering a more granular and dynamic understanding of the Okun's relationship, making it a valuable resource for economists and policymakers seeking to address unemployment challenges in Pakistan and similar economies.

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