The Validity of Okun’s Law in Nigeria: A Difference Model Approach

This paper, empirically, tests the validity of Okun’s law in Nigerian economy from 1980-2012. The two versions of the difference model approach of the Okun’s law are used even though one of them is frequently used in the literature. We utilize Var-cointegration method and examine the direction of causality using the Var Granger causality/Block Exgeneity Wald test. We find that the trace test statistic demonstrates only one cointegrating vector at 5% level. Both the Var Granger causality/Block Exogeneity Wald test and error correction model provide exactly the same conclusion of a uni-directional causality from unemployment rate to real output growth. However, Okun’s coefficient estimates carry positive signs in both models and are infact contrary to unemployment–output relationship even though unemployment rate determines the real output growth in Nigeria but not vice versa from the causality analysis. Therefore a good policy space is needed to create an enabling environment for drastic reduction of unemployment which is a pointer to increasing aggregate demand and output growth in Nigeria in the long run.