Econometric Test on Growth-Unemployment Nexus in India
Abstract
Generally, the economic growth boosts employment growth rate but empirical evidences do not support these views in all cases. In this paper, the author endeavors to relate growth with unemployment rate during 1991-2016 in India using regression models, Granger Causality test, Johansen Cointegration test and Vector Error Correction model. Impulse response functions were fitted for testing stationary. Unit circle was found out to check stability of the Vector Error Correction. Output gap is measured by deducting Hodrick-Prescott Filtered trend value from the actual output. Unemployment gap is measured by deducting natural growth rate of unemployment from the actual unemployment rate. The data on Indian unemployment rate, growth rate and GDP from 1991 to 2016 have been taken from the World Bank. The paper concludes that growth-unemployment nexus is significantly negative at 10% level. Their relation is not causal but is co-integrated at 10% level. VECM is stable and non-stationary where in one error correction process the speed of adjustment is high and significant. The relation between output gap and unemployment is negative and insignificant. They are not co-integrated and have no causality. The nexus between output gap and unemployment gap is significantly negative but the relation has no causality and co-integration. VAR model is a good fit where variables are related with previous periods. The relation between growth and unemployment gap is insignificantly negative and co-integrated where VECM is stable but non-stationary and one speed of adjustment is significantly fast and other is insignificantly slow in error correction process.
Downloads
References
Abu, N. (2017). Does Okun's law exist in Nigeria? Evidence from the ARDL bounds testing approach. Contemporary Economics, 11(2), 131-144.
Arewa, A., & Nwakanma, P. C. (2012). Potential real GDP relationship and growth process of Nigerian economy: An empirical re-evaluation of Okun’s law. European Scientific Journal, ESJ, 8(9), 25-33.
Ball, L., & Mankiw, N. G. (2002). The NAIRU in theory and practice. Journal of Economic Perspectives, 16(4), 115-136. https://doi.org/10.1257/089533002320951000.
Diwani, G. (2017). Nexus between population, income, output and employment: Econometric evidence from India. International Journal of Multidisciplinary and Current Research, 5, 96-103.
Doornik, J. A., & Hansen, H. (2008). An Omnibus Test for Univariate and Multivariate Normality. Oxford Bulletin of Economics and Statistics, 70, 927-939. https://doi.org/10.1111/j.1468-0084.2008.00537.x.
Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the Econometric Society, 37(3), 424-438.
Hodrick, R., & Prescott, E. (1997). Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking, 29(1), 1-16. https://doi.org/10.2307/2953682.
Jelilov, G., Obasa, O. J., & Isik, A. (2016). Impact of inflation and unemployment on economic growth in ten (10) selected member’s states of Economic Community of West African States (ECOWAS) (2001-2014). Advances in Economics and Business, 4(5), 222-244. https://doi.org/10.13189/aeb.2016.040503.
Johansen, S. (1988). Statistical Analysis of Cointegration vectors. Journal of Economic Dynamics and Control, 12(2-3), 231-254. https://doi.org/10.1016/0165-1889(88)90041-3.
Johansen, S. (1995). Likelihood-based inference in cointegrated vector autoregressive models. London, UK: Oxford University Press. https://doi.org/10.1093/0198774508.001.0001.
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money, London: Macmillan.
Khan, M. A., Saboor, A., Mian, S. A., & Anwar, A. (2013). Modeling the relationship between GDP and unemployment for Okun’s law specific to Pakistan during 1976-2010. Theoretical and Applied Economics, 10(587), 71-78.
Kreishan, F. M. (2011). Economic growth and unemployment: An empirical analysis. Journal of Social Sciences, 7(2), 228-231.
Levine, L. (2012). Economic growth and the unemployment Rate. Washington, DC: Congressional Research Service.
Madito, O., & Khumalo, J. (2014). Economic growth- unemployment nexus in South Africa: VECM Approach. Mediterranean Journal of Social Sciences, 5(20), 79-84. https://doi.org/10.5901/mjss.2014.v5n20p79.
Marshall, A. (1890). Principles of Economics. London, UK: Palgrave Macmillan.
Mihaela, S., & Mihaela, B. (2013). Correlation between economic growth and unemployment. Annals-Economy Series, 3, 195-198.
Neto, A., & Silva, S. T. (2013). Growth and unemployment: A bibliometric analysis on mechanisms and methods. (FEP Working Paper No. 498), University of Porto.
Okun, A. M. (1962). Potential GNP: Its Measurement and Significance (pp. 98-103). New Haven: Yale University, Cowles Foundation for Research in Economics.
Phillips, A. W. (1958). The relation between unemployment and the Rate of change of money wage rates in the United Kingdom, 1861–1957 1. Economica, 25(100), 283-299.
Pigou, A. C. (1933). The Theory of Unemployment. London: Basingstoke, UK: Macmillan.
Pınar, E., Serkan, C., Deniz, Z., & Murat, O. (2014). Econometric evaluation of the relationship economic growth and unemployment in EU & Turkey. Annals of the University of Oradea, Economic Science Series. 23(1), 452-462.
Robinson, J. (1937). Introduction to the Theory of Employment. Landon, UK: Macmillan and Co. Ltd.
Say, J. B. (1821). A Treatise on Political Economy. London, UK: Transaction Publishers.
Schumpeter, J. (1936). [Review of the book The General Theory of Employment, Interest and Money, by J.M. Keynes]. Journal of the American Statistical Association, 31(196), 791-795. https://doi.org/10.2307/2278703.
Sodipe, O. A., & Ogunrinola, I. O. (2011). Employment and economic growth nexus in Nigeria. International Journal of Business and Social Science, 2(11), 232-239.
Umair, M., & Ullah, R. (2013). Impact of GDP and inflation on unemployment rate: A study of Pakistan economy in 2000-2010. International Review of Management and Business Research, 2(2), 388-400.
Copyright (c) 2018 Debesh Bhowmik
This work is licensed under a Creative Commons Attribution 4.0 International License.
JQM follows an open-access publishing policy and full text of all published articles is available free, immediately upon publication of an issue. The journal’s contents are published and distributed under the terms of the Creative Commons Attribution 4.0 International (CC-BY 4.0) license. Thus, the work submitted to the journal implies that it is original, unpublished work of the authors (neither published previously nor accepted/under consideration for publication elsewhere). On acceptance of a manuscript for publication, a corresponding author on the behalf of all co-authors of the manuscript will sign and submit a completed Copyright and Author Consent Form.
