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Okun’s law in an emerging country: An empirical analysis in Indonesia

Author

Listed:
  • Cheng-Wen Lee

    (Department of International Business, Chung Yuan Christian University, 200 Chung Pei Road, Chung Li District, Taoyuan City, 32023, Taiwan, ROC)

  • Andrian Dolfriandra Huruta

    (Ph.D. Program in Business, Chung Yuan Christian University, 200 Chung Pei Road, Chung Li District, Taoyuan City, 32023, Taiwan, ROC)

Abstract

Objective: Labor economics policy instruments, such as gross domestic product (GDP) and unemployment are persistent challenges for every country. As an emerging country, Indonesia seeks to reduce unemployment and increase gross domestic product. The aim of this study is to investigate the relationship between GDP and the open unemployment rate in Indonesia starting from 1987 to 2017. Research Design & Methods: The data were obtained from Indonesia’s Central Bureau of Statistics website. Moreover, the econometric model of the Granger causality and Structural Vector Autoregression capture the causality of GDP and the open unemployment rate. Findings: The Granger causality test suggested the open unemployment rate does Granger cause gross domestic product, but not vice versa. In line with the Structural Vector Auto-regression, there was a negative relationship between GDP and the open unemployment rate. Contribution & Value Added: This study is in line with Okun’s law which explains the more labor used in production will have implications for increasing GDP in the economy. It means this study presents evidence to support the existence of Okun’s law in Indonesia. Also, this study contributes to the literature in an emerging country by using the Structural Vector Autoregression model.

Suggested Citation

  • Cheng-Wen Lee & Andrian Dolfriandra Huruta, 2019. "Okun’s law in an emerging country: An empirical analysis in Indonesia," International Entrepreneurship Review, Centre for Strategic and International Entrepreneurship at the Cracow University of Economics., vol. 5(4), pages 141-160.
    • Handle: RePEc:krk:ientre:v:5:y:2019:i:4:p:141-160
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    More about this item

    Keywords

    Okun’s law; Gross Domestic Product; Open Unemployment Rate; Granger Causality; Structural Vector Autoregression; Emerging Country;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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