Econometric Estimation of the Relationship between Unemployment Rate and Economic Growth of FYR of Macedonia

Abstract

This study aims to estimate empirically the relationship between economic growth and unemployment rate in FYR of Macedonia applying the Okun's Law. For analyzing the Okun's coefficient are used four types of models such that, the difference model, the dynamic model, ECM, and VAR estimation approach, in order to consider both, the short term and the long term possible relationship. The analysis consists on quarterly data covering the period 2000-2012. The empirical results from all models do not indicate robust evidence and do not confirm an inverse linkage between unemployment rate and economic growth, as the Okun's Law suggests. Based on the VAR methodology and Engel-Granger cointegration test, it doesn’t exist a causal relationship between these two variables and a change in the growth rate of real GDP doesn’t cause a change in the rate of unemployment and vice-versa. The main reasons that go far to explain the regression outputs are: first, the large informal employment that accounts at about one fourth of total employment and second the structural unemployment. The study also highlights that the country's economic policies have not been suitable for fostering development and reducing unemployment, as the primary source of employment is the public sector rather than the private sector.