Testing Okun’s Law for Turkey (1923-2019)

Abstract

This study tests Okun’s law for Turkey using annual data gathered for almost a century (1923–2019). In contrast to the rest of the literature focusing on a linear relationship between unemployment and output levels, we argue for a cointegrating nonlinear autoregressive distributed lag (NARDL) model. We find clear evidence of an asymmetric cointegrating relationship between unemployment and output as well as asymmetric short-run impacts. Interestingly, these relationships are positive. Asymmetric cumulative dynamic multipliers confirm the results, which can be explained by the structural features of the Turkish unemployment such as the high female and youth unemployment rates, a large agricultural sector, high firing costs, and the high level of informal employment as well as hysteresis. Therefore, effective labour market reforms should consider asymmetries in the long-run unemployment and output relationship as well as asymmetries in their short-run impacts in order to handle jobless recoveries in Turkey.