Application of okun law to the developing economies: Indian perspective

The study empirically examines unemployment-output relationship in the framework of Okun law for India. Employing the different version of Okun law, the study also checks the stability over the period using rolling window regression techniques and Brown Durbin Evans test. Furthermore, we also analyse that how the Okun law behave during recessionary and expansionary phase of business cycle. We find based on difference specification that one percent increase in economic growth leads to 0.07 percent decline in unemployment. In the gap specification the Okun coefficient is 0.03. The beta coefficient (otherwise known as Okun coefficient) which we have obtained is far from Okun original estimate of 0.3. The result for extended version where we control for wage, labour productivity capital intensity etc. reinforce the original equation suggesting the weak relation between unemployment and economic growth. The result indicates that Okun coefficient is not stable over the period. As over the maximum period Okun coefficient is positive. So, this finding validates the hypothesis of jobless growth. Additionally, the asymmetrical analysis shows that Okun coefficient is more responsive to recession than expansion over the period. Thus, we propose that given the impact of COVID-19 on the economy, low labour force participation and relatively high proportion of youth constitute as NEET, the Indian economy require a multipronged policy, so that the objective of high growth with productive employment can be achieved. Otherwise, demographic dividend which vanishes in 2040 would go into vain.