An Empirical Robustness of Okun’s Law in South Africa: An Error Correction Modelling approach

Abstract

Key intension of this paper was to verify Okun’s law in the South African perspective using data of the period 1990Q1 to 2013Q1. After detrending the series, the first lag and rank were used in the analysis to estimate Okun’s coefficient. The coefficients obtained were not in accordance with an acclaimed 3%. The short run model confirmed that a speed of 12.8% per quarter may be required to enable the system of unemployment rate in the country to be inverted back to normal. Toda-Yamamoto causality test reported no feedback associations between unemployment and GDP in SA. Empirically, evidence provides positive coefficients implying inapplicability of Okun’s law to South Africa. Nonetheless, unemployment still remains high according to the South African standards and it has to be dealt with amicably. The paper recommends to government and policy makers to up their games by employing economic policies that are more focused on to operational changes and makeover in workforce market.

DOI: 10.5901/mjss.2014.v5n23p435