Relationship between Unemployment and Gross Domestic Product: Evidence from Pakistan using Okun's Law

Abstract

Today unemployment is a problem faced by many countries. It aggravated further when recession hit the globe in 2008-2009. Many countries are still unable to bring unemployment level to normal levels and struggling hard to bring economy back on track. The output unemployment relationship was postulated by Arthur Okun in 1962 which led to famous Okun's Law. The research is aimed at finding Okun Co-efficient and to verify the findings of this Law for the case of Pakistan economy. Annual Time series from 1985 to 2010 on unemployment and GDP was used for data analysis. Data was examined for CLRM conditions and Hodrick Prescot filter approach is used in gap model to examine direction and long run relationship between unemployment and GDP. This paper will be helpful for stakeholders in policy making and can be used for further analysis for cross country comparison(s) using panel data.