Economic Activity and Unemployment Dynamics in Turkey

Abstract

Stylized Business Cycle facts show that employ‐ ment is highly procyclical and unemployment is highly countercyclical with the aggregate eco‐ nomic activity. Also, Okun’s law indicates a negative relationship with between economic growth and unemployment rate. This paper’s goal is to find out what causes high unemploy‐ ment and what is the relationship between economic growth and unemployment in Turkey. It aims to show not only the relationship be‐ tween cyclical output and unemployment, but also how the changes in GDP gap affect the unemployment. Further, it analyzes whether the relationship between GDP gap and Unemploy‐ ment is symmetric. The results of the Granger causality test indicate that there is a unidirec‐ tional causality from GDP gap to Unemployment. Also, impulse response and Variance decomposi‐ tions show that following the crises, although there is a strong and quick recovery in economic activity, but same recovery is not seen in em‐ ployment and in the reduction of unemployment rate. This can be seen as a typical indication of