The Relationship between Economic Growth and Unemployment Rates: Validation of Okun’s Law in Panel Context

Abstract

This paper investigates the relationship between economic growth and unemployment rates of total and youth population in panel context. The research is in context of Okun’s Law and includes two panels: 1) Panel composed of seven South Eastern European countries and 2) Panel composed of 14 EU members’ countries whose youth unemployment rate in 2017 was below the EU average rate. The econometric analysis of the paper is based on the Autoregression Distributed Lags Model, using data for the period 1991-2017. The results suggests that there is a statistically significant relationship between the economic growth and unemployment rates in both panels, whereas the relationship is stronger in the EU panel, while the adjustment of the unemployment rates to the changes in the economic growth is faster in the SEE panel. A part of this result can be explained by the more flexible labor market institutions in the developing countries, as those that are a part of the SEE panel.