OKUN’S LAW
1.0 Background of the Study
A one percentage point fall in the rate of unemployment (relative to the natural rate) is associated with a two-and-a half- percent rise in production relative to its potential. This relationship is called “Okun’s Law,” after . Okun’s law says that if you keep track of one, you are keeping track of the other. Deviations from Okun’s Law are rare: output is never more than two percent away from the value that Okun’s law would predict, and is usually less than one percent away.
The connection between unemployment and GDP growth is often formally summarized by the statistical relationship of Okun’s law. As developed by the late economist in 1962, the “law” related decreases in the unemployment rate to increases in output growth. Over time, the exact quantitative form of this relationship has changed somewhat (1999). However, the negative correlation between changes in the unemployment rate and changes in GDP growth is viewed as one of the most consistent relationships in macroeconomics. The widely accepted connection of Okun’s law to inflation can be better understood by noting that Okun more precisely considered the unemployment/output relationship as relating percentage deviations of output from its potential level to deviations of the unemployment rate from its “natural” level (1993). That is, unemployment above the inflation-threshold unemployment rate reduces GDP below potential output, and for every 1% excess of the natural unemployment rate, a 2% to 3% reduction in GDP is predicted. The difference between actual and potential GDP is called the GDP gap. It may be expressed as a percentage or an absolute amount.
2.0 Statement of the Problem
The achievement of incorporating the Harris-Todaro hypothesis in Okun’s law to solve the problem of measurement of unemployment is the main issue here. How does the macro econometric modeling techniques of VAR based on time series data modeling affect the analysis of unemployment? Is the application of Harris-Todaro hypothesis in Okun’s Law effective in achieving the equilibrium of unemployment? The Harris-Todaro hypothesis replaces the equality of wages by the equality of ‘expected’ wages as the basic equilibrium condition in a segmented but homogeneous labor market, and in so doing, it generates an equilibrium level of urban unemployment when a mechanism for the determination of urban wages is specified. What are the factors that affect the further increase in the rate of unemployment in accordance to the Okun’s law? Okun’s law can be stated as saying that for every one percentage point by which the actual unemployment rate exceeds the so-called “natural” rate of unemployment, real gross domestic product is reduced by 2% to 3%.
3.0 Objectives of the Study
The main purpose of this study is to analyze the how Okun’s law can be used to its full potential to solve the problems of unemployment. The understanding of the economic situation of a region, as also the design and instrumentation of efficient public policies, depend in great measure from the availability of the pertinent information to the economic aspects that are sought to be embraced. This research, specifically, purports to determine how the application Harris-Todaro hypothesis in combination with Okun’s law affects the inflation or deflation of an economy. This research takes into account the practices that the functional relationship is identified between the GDP and unemployment, considering characteristics pertaining to the economy. The study also seeks to evaluate how the usage of the New-Keynesian school of macroeconomics provides microeconomic foundations in solving unemployment measurement.
4.0 Research Methodology
A descriptive research intends to present facts concerning the nature and status of a situation, as it exists at the time of the study and to describe present conditions, events or systems based on the impressions or reactions of the respondents of the research (1994). It is also concerned with relationships and practices that exist, beliefs and processes that are ongoing, effects that are being felt, or trends that are developing (1970).
In this study, primary and secondary research will be both incorporated. The reason for this is to be able to provide adequate discussion for the readers that will help them understand more about the issue and the different variables that involve with it. The primary data for the study will be represented by the survey results that will be acquired from the respondents. On the other hand, the literature reviews to be presented in the second chapter of the study will represent the secondary data of the study.
The research will be presented in written form with the addition of data charts, which will present the project’s results. Pie charts and network charts will be needed to illustrate some of the analyzed data. This cannot be confirmed, however, until the research data have been analyzed.
4.0 Reference
Credit:ivythesis.typepad.com
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