A Verification of Okun’s Law: The Case of Southeast Asian Countries

Abstract

The study investigates the relationship between unemployment and economic growth in selected Southeast Asian countries using annual time series from 2000 to 2020. Panel OLS, fixed effect, and Random effect were performed with an error correction method to ascertain the relationship between explanatory variables and response. The error correction term indicated a long-run relationship between unemployment and economic growth. The study used two models to evaluate the relationship between unemployment and economic growth. Model one explains how economic growth affects unemployment, while model two is devoted to examining the effect of unemployment on economic growth. The test results for model one indicated that the Random effect is the best-fitted model and concluded that economic growth has no significant influence on unemployment. However, Foreign Direct Investments makes a negative influence on unemployment. Further, model two investigates the effect of unemployment on economic growth, where Pooled OLS was selected. According to the test statistics, it can be concluded that unemployment harms economic growth, while Foreign Direct Investments and Inflation have a positive influence on economic growth. However, trade openness makes a negative effect on economic growth. Therefore, it can be concluded that the validity of Okun's law in Southeast Asian countries is limited.