Abstract
Abstract Purpose. The purpose of this paper is to empirically investigate Okun’s Law that proposes an inverse relationship between the rate of unemployment and economic growth. In other words, the higher the unemployment rate the lower the economic growth for a given country which represents lost production opportunities.
Design/methodology/approach. The paper analyses 185 countries around the world. In particular, the average economic growth rate over 5 years [from 2011 to 2015] is regressed against the average unemployment rate over the same period.
Findings. The paper discovers that or 185 countries in the world, a strongly negative association [26% Correlation at a 1% significance level] is found. More importantly, the results strongly support Okun’s Law: that a 1% drop in unemployment leads to a ¼ % increase in growth, in crude terms, across the globe.
Research limitations/implications. The research uses a parsimonious but robust analytical framework and invites future empirical investigation that uses a cross-sectional time series approach.
Originality/value. The paper suggests that from the rudimentary but robust analysis, there is a strong link between unemployment and economic growth.
Paper type. Empirical paper.