A PROPOSED MODEL FOR OKUN LAW IN THE SHORT-RUN AND LONG-RUN THE CASE OF EGYPT (1982-2018)

Abstract

The paper aims to study the dynamic interaction between GDP growth rate and unemployment rate, or unemployment rate responsiveness to changes in GDP growth rate. Using a set of Egyptian data (from 1982 to 2018), error correction model, and production function version of Okun law. The paper adds to empirical evidence that the relationship is clearer between growth rate and employment than between growth rate and unemployment, in other words concept of Okun’s law is linear between employment and GDP growth and not linear between unemployment and GDP growth. The long run coefficient shows (other things remain constant) that, 1% GDP growth rate more than 1.472%, is associated with 1.17% change in the employment rate in the same direction. At the same time, the short run coefficient shows (other things remain constant) that, 1% GDP growth rate more than 2.564%, associated with 0.961% change in the employment rate in the same direction. The value of this finding is that it helps policymakers to understand the mutual independence between Okun law variables and the way they interact.