The Determinants of Okun’s Coefficients in Oil-Producing Countries: New Evidence from Quantile Regression

Abstract

Oil dependence, as a main factor in driving economic growth, undoubtedly plays a crucial role in determining labour market outcomes. This paper utilises the quantile regression approach and the dynamic system GMM methods to investigate the role of oil dependence in determining Okun’s coefficient differences. This study uses the difference version of Okun’s law to estimate Okun’s coefficients for each country through the “rolling window technique” from 1991 to 2019 for panel data from 29 oil-producing countries. Okun’s coefficients, estimated in the previous step, became the dependent variable in the second step. The results indicated that the differences in oil dependence prove relevant when accounting for Okun’s law differences in oil-producing countries. In other words, oil dependency is found to be the key determinant of Okun’s coefficient. Particularly as oil production per capita increases, unemployment becomes less sensitive to output growth. Additionally, this study has found that better institution quality and a higher level of unemployment strengthen Okun’s coefficient. Finally, our results confirm the effect of the financial crisis on Okun’s coefficients. The findings of this paper conclude with clear evidence for policymakers about the role of oil dependency in economic performance. Economic policy improvements enable a country’s oil income to be used more effectively by strengthening its economic sectors, achieving higher economic growth, and thus lowering unemployment rates. The governments of these countries should pay attention to the structural reforms that enhance the development of the non-oil sector and improve the incentives for workers to promote employment in other economic sectors