Economic Growth in India, Is It a Jobless Growth? An Empirical Examination Using Okun’s Law

Abstract

This study empirically examines the relationship between unemployment and output in India by fitting the Okun’s law. To achieve this objective, an annual time series data for unemployment and output were collected from the World Bank and Reserve Bank of St. Louis. The empirical estimation starts with testing the unit root evidence using Perron (1997) and Elliot et al. (Econometrica 64(4):813–836, 1996) DF-GLS, and the impact models were estimated using linear and nonlinear econometric models. The estimates show that quantitatively, there is no significant difference between the two modelling approaches. The evidence indicates that the relationship between unemployment and output for the Indian economy is consistent with Okun’s law. We find most of the coefficients to be negative, less than unity and statistically significant and this conforms to the theoretical expectation. The study also finds that based on the estimated evidence the 11.75% nominal GDP growth rate as targeted by the Indian government will only result in 0.52% decrease in unemployment which is insignificant for the Indian population. The study found that, to get a 1% decline in unemployment, 25% nominal GDP growth rate is required which is twice the targeted value. Therefore, the study concludes that although Indian output is growing, the growth is jobless because it is not up to the threshold level that ensures a decline in unemployment.