Economic growth and unemployment nexus: empirical test of Okun’s law in Somalia

Abstract

This paper aims to empirically examine the relationship between GDP and unemployment in Somalia from 2000 to 2021. The study also estimates Okun's coefficient. To evaluate the association between the unemployment rate and economic growth, we employ the Hodrick–Prescott (HP) filter detrending technique, the Augmented Dickey–Fuller (ADF) test, ordinary least squares (OLS), and fully modified OLS. The findings of this study demonstrate that the series is stationary at the level. However, the results confirm a statistically insignificant negative relationship between unemployment and economic growth. Consequently, our findings suggest that Okun's law does not apply in Somalia. For robustness, we employ fully modified ordinary least squares (FMOLS), canonical cointegrating regression (CCR), and dynamic ordinary least squares (DOLS). Nevertheless, the relationship between the GDP gap and unemployment is not strong enough to be considered statistically significant, and other factors may also influence unemployment. Therefore, policies aimed at reducing unemployment should take into account various factors, including education and training, labor market regulations, and social protection measures.