An Empirical Estimation of Okun’s Law in Context of Pakistan

Abstract

This research work is on the topic of an empirical estimation of Okun’s law in context of Pakistan. Coefficient of  Okun’s law is estimated to check whether this law exist in Pakistan’s economy or not. Okun’s law shows three to one link between real GDP and rate of unemployment. Time series data of real GDP and rate of unemployment of Pakistan have been used to find the validity of Okun’s law. Duration of data is 1972 - 2012. Different three versions of Okun’s law gap version, difference version and dynamic version are used to calculate the Okun’s coefficient. Ordinary least square method is applied for anaylsis. The empirical results show that there is no existence of Okun’s law in Pakistan’s economy. Coefficients estimated by using all the three versions are very small and reject the presence of this law in Pakistan.

Keywords: Okun’s law, gap version, difference version, dynamic version, GDP, Unemployment, Potential output, natural rate of unemployment, OLS.