Behttina Kim M.Barrios 3e4 Mr. George Villasis Labor Economics Do Economic growth and employment have an effect on Unemployment? Summary: This paper seeks to determine whether employment and economic growth have an effect on unemployment rate. Okun’s law explains the positive relationship between economic growth and employment rate. It states that as the growth economy goes up, products or output will increase thus it will have a higher demand for products. To make it happened the firm must increase their employment of workers to catch up with the growing demand of products. In contrast, growth slowdowns coincide with rising unemployment because of lesser demand for products or any goods or services. This can be supported by the fact that the demand for labour or any other productive resource, Is a derived demand. This mean that the demand for labour depends on, or is derived from, the demand for the product or services it is helping to produce. Introduction: During the early stages of the most recent economic recovery, there has been a much discussion regarding the relationship between economic growth and employment which is also known as Okun’s law which can be said to have an effect on unemployment rate. Unemployment rate the percentage of the total labour force that is unemployed but actively seeking employment and willing to work. Output, the most important concept of macroeconomics, refers to the total amount of goods and services a country produces, commonly known as the gross domestic product. Macroeconomists have come to agree that when the economy has witnessed growth from period to period, which is indicated in the GDP growth rate, unemployment levels tend to be low. This is because with rising (real) GDP levels, we know that output is higher, and, hence, more labourers are needed to keep up with the greater levels of production. Employment rate is the percentage of the labour force that is employed. The employment rate is one of the economic indicators that economists examine to help understand the state of the economy. The number of jobs being created can signify whether an economy is improving, overheating, or waning. In his 1962 article, okun represented two empirical relationships connecting the rate of unemployment to real output, which have become associated with his name. According to it, there is a positive relationship between economic growth and employment rate and there is a negative correlation between unemployment and employment. Okun’s two relationships arise from the observation that more labour is typically required to produce goods and services within an economy. More labour can come through a variety of forms, such as having employees work longer hours or hiring more workers. To simplify the analysis, okun’s assumed that Unemployment rate can serve as a useful summary of the amount of labour being used in the economy .according to Edward S. Knotek, Okun’s law is usefull for policymakers and economists. The evidence suggests that Okun’s relationship between changes in the unemployment rate and output growth Okun’s relationship can still be useful as a forecasting tool--provided that one takes its instability into account .089669 4.39 0.32 japan 0.54 Germany 0.0139 9.12 *Introduction to Macroeconomics.125031 0.993723 2.E. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) Prob.266349 0.39 tells us that output growth of 1% above normal growth rate for 1 year decreases the unemployment rate by 0. A high rate of unemployment.02 0. “okun’s law across countries”.644181 -2. A very low rate of unemployment would be associated with reverse scenario.39%.D.42267 -7. it proves that relationship is significant and that GDP can affect the unemployment rate.172701 7. With the probability of 0.125031). Nevertheless. P 198 The table explains the negative correlation between GDP growth and unemployment rate.260913 0. The coefficient β states the effect on the unemployment rate deviation of output growth.013941 With the negative coefficient of GDP (-7. 0.05. Findings: Okun’s law coefficient across countries and time Country 1960-1980 β 1981-2003 β United states 0. A value of β of 0.928720 171.0139 which it less than 0. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 20.073516 5. one would expect the actual rate of output to be below its potential. the coefficient β depend in part on how firms adjust their employment in response to the fluctuation in their production. Error t-Statistic 4. Dependent Variable: UER Method: Least Squares Date: 02/04/10 Time: 14:08 Sample(adjusted): 2000:1 2005:2 Included observations: 22 after adjusting endpoints Variable C LOG(GDP(10)) R-squared Adjusted R-squared S.229666 2. it shows the inverse relationship between unemployment rate and GDP growth rate.5480 -53.20 0.0001 0. would typically be associated with idle resources in such a circumstances.531818 3.has varied considerably over time and over the business cycle. okun reasoned.275999 Std.80867 2.336863 5. .39 United kingdom 0.15 0.694608 Mean dependent var S. “Introduction to Macroeconomics”. firms will hire more workers to compensate for the increased demand. But employment. pp. of course. An increase in employment. does not imply a reduction in unemployment of the same amount. Bibliography: BOOK Blanchard. An increase in labour supply tends to raise employment and dampen productivity increases significantly. Olivier. fourth edition. okun’s law predicts that the growth slowdowns typically coincide with rising unemployment. A better labour market situation will attract workers who had no job before because high productivity of firms entails employment to those who are not currently working or jobless. 186-191. but certainly not 1:1. Similar to these increases in labour supply is the effect of high unemployment rates. There is a strong and positive correlation between GDP-growth and the change in employment. There is an increase in employment because labor is a derived demand. we can definitely say that as a relationship between changes in the unemployment rate and growth. will rise only if economic growth rates are outstripping productivity gains because as we know that if the output increases which means that there are high demand of the goods and services that they provide. JOURNAL . of course.1 inverse relationship between Unemployment rate and GDP growth rate Conclussion: With the following finding that we came up.figure 1. There is a negative correlation between changes in employment and unemployment. com .com www.Ewal Walterskirchen “The relationship between Growth.neda.nscb. Barcelona Spain William Seyfried. Employment and Unemployment in the UE” September 1999. Winthrop University “Examining the relationship between employment and economic growth in the ten largest states” WEBSITE www.