Economic Growth and Unemployment Nexus in USA

Abstract

Empirical relationship between unemployment and growth is not pronounced as we investigate the economic scenario of the nations. Author attempted to relate US unemployment rate to the growth during 1948-2016 by using bivariate and log regression models, Bai-Perron Model, Granger Causality test, Johansen cointegration test, vector auto regression and vector error correction models. Even, author also verified relationship between unemployment gap, output gap and growth in USA during the same period. Data on US unemployment rate, GDP and growth rate have been taken from Bureau of US census during 1948-2016. Data on US natural rate of unemployment was taken from Fed Bank of St.Louis from 1949 to 2016.The paper concludes that US unemployment rate is increasing at the rate of 0.507 per cent per annum and it has upward structural break in 1971.The nexus follows the Okun’s law in USA. US unemployment is negatively related with growth rate during 1948-2016.Their relationships are causal and cointegrated. VAR model is stable and stationary. Residual test showed non-normality and autocorrelations.Moreover, author showed negative relation between growth and unemployment gap in USA during 1949-2016.They have no causality and cointegration. Their VAR model is stable and stationary. The residual test proved non-normality and auto-correlation problems. Perceptible output gap influences unemployment gap negatively during 1949-2016 .It has significant bi-directional causality and one cointegrating equation. In Vector error correction model, error corrections are significant with high speed having stability, autocorrelation and non-normality. The rate of decline in unemployment rate due to increased growth rate in USA during 1948-2016 was marginal.