Does Okun’s Law Hold for China? Some Empirical Evidence

Abstract

This paper seeks to estimate the applicability of Okun’s law to the situation in China between 1991 and 2020. A defining and most significant feature of this paper is that China’s unemployment rate has been proxied by youth unemployment and urban unemployment. The stochastic properties test reveals that all the three variables follow I(1) process. The paper uses this knowledge to build data generating process (DGP), which is an outstanding contribution to international research into the steady state growth. Many researchers have pointed out that the poor countries catch up faster and, consequently, their growth rate should have a trend component to it. The applied regression model has proxied the trend when estimating the operation of the Okun’s law. The inclusion of trend, strongly factual, is accounted for and reveals that Okun’s law is valid for China. Apart from the OLS estimator for testing the Okun’s law, the generalized method of moment estimator has also been used as another estimator with the first lag of both unemployment and GDP as instrumental variables. Empirical evidence supports the proposition that Okun’s law is indeed valid in the case of China contrary to the conclusion of some studies.