TESTING THE VALIDITY OF THE OKUN'S LAW: EXAMPLE OF TURKEY

Abstract

When economic theories are examined, one of the ways to reduce unemployment is to increase economic growth. The relationship between economic growth and unemployment was first expressed by Arthur M. Okun in 1962. According to Okun, there is an inverse relationship between economic growth and unemployment rate. In other words, an increase in economic growth reduces the unemployment rate. Looking at the Turkish economy after the 2000s, it is seen that the relationship between economic growth and unemployment contradicts Okun's theory. Therefore, the aim of this study is to test whether Okun's law is valid for Turkey. In the study, the relationship between economic growth and unemployment rate for the Turkish economy was analyzed using annual data for the 2001-2020 period. The variables used are GDP and unemployment rate as growth data. First of all, unit root tests were carried out in order to determine whether the series are stationary or not. Afterwards, analyzes were made on whether the series were cointegrated, and the results were interpreted, and the existence of a causal relationship between the variables was examined using the Granger causality analysis method. At the same time, whether there is a structural break in any time period between 2001-2020 was examined by structural break tests. According to the results of the analysis, despite the 1% increase in the unemployment rate, the GDP decreased by 0.75. The fact that there is an inverse relationship between the two variables is compatible with the theories in the literature. The causality test results show that there is no causal relationship between the two variables, but a long-term relationship can be found.