Efficacy of growth-led unemployment reduction hypothesis in India using Okun’s law

Abstract

PurposeThe purpose of this paper is to examine whether increased labour productivity could reduce the impact of output growth on the unemployment rate in India over the period 1991–2019 through Okun’s law and its expanded form.Design/methodology/approachThe study uses Okun’s law and its expanded form, with the inclusion of labour productivity in the actual model. Further, the relationship between output growth, unemployment rate, and labour productivity is analysed by using the gap model, the difference model, the dynamic model, the error correction model (ECM), and the vector autoregressive (VAR) approach.FindingsThe empirical results from the applied models do not confirm an inverse relationship between output growth and the unemployment rate with an unexpected positive sign of Okun’s coefficient. The evidence of preference for more capital-intensive techniques in the Indian economy is also strongly supported by the results of the expanded form of Okun’s law with a statistically significant positive coefficient of GDP and labour productivity.Originality/valueThe study examined the proposed relationship using Okun’s law and its expanded form, which had not been employed in earlier studies in the context of India. The authors also show that a high economic growth rate is a necessary but not sufficient condition to solve the chronic and structural unemployment problem in India.