English

Abstract

The Okun’s law, which explains the inverse relationship between unemployment and output growth, has been observed to have broken down in most developing economies. The failure by researchers to take into account the asymmetric properties of the relationship between unemployment and output has been attributed to the limitations of the Okun’s law in explaining the inverse relationship between unemployment and output growth developing economies. The study was carried out with the objective of empirically testing Okun’s Law in Zimbabwe, using a two state Markov Regime Switching Model (MRSM) from 1991-2018. The study employed both the first difference approach and the gap approach with the Hodrick-Prescott (HP) and the Butterworth filters employed in determining the cyclical components of the gap models. Estimation results show that the Okun’s law is valid during economic expansions with the Okun’s coefficient having a magnitude of between -0.01 and -0.003, thereby reflecting the existence of an inverse relationship between economic growth and unemployment. The observed Okun coefficients during economic booms are however, economically insignificant and in so doing, attributes unemployment more towards structural causes and less to cyclical causes. During economic contractions, the Okun’s law was observed to have broken down and with changes in output observed to be insignificant in explaining unemployment during economic downturns. This result is attributed to the large composition of the informal sector in the economy which is an alternative source of employment to the formal sector when the economy contracts thus, making unemployment invariant to economic contractions. The study recommends that policy makers address the structural constraints to both labor supply and demand in the economy. Key words: Economic growth, Okun’s law, regime switching, unemployment, Zimbabwe.