Revisiting the Relationship between Unemployment Rate and Economic Growth in Algeria, 1970-2014: Co-Integration Approach using ARDL model

Dahmani, Mohamed Driouche and Rekrak, Mounia (2015): Revisiting the Relationship between Unemployment Rate and Economic Growth in Algeria, 1970-2014: Co-Integration Approach using ARDL model.

Abstract

The study provides an estimation of Okun’s law in Algeria during the period (1970 - 2014) using for this purpose time series of techniques. Our empirical analysis consists of Dickey-Fuller test (ADF) (Dickey and Fuller 1979 and 1981), and the Phillips–Perron (1988) test and ARDL Bounds Testing Approach to Co-integration test between unemployment rate and economic growth. The estimated results of the present study conformed existence of stable, long run negative effect juste in one model (the difference version of Okun's law), whereas, in short run no relationship is observed. A one percent increase in economic growth is associated with reduction in the unemployment level by 0.265 percent in the long run. The ECM indicates high speed of adjustment of short run fluctuation as 63 percent short disequilibrium adjusts in a year. Algeria must try to increase and diversify the sources of economic growth. The results of this study have important implications for determining macroeconomic policy. It is absolutely essential that the Algerian economy cease to be excessively dependent on the hydrocarbon sector, which is intensive capital but requires little labour. The Algerian economy should diversify away from its dependence on the energy sector.

• Item Type: MPRA Paper
• Language: English
• Keywords: Okun’s Law, economic growth, unemployment rate, HP filter, ARDL Bounds Testing Approach to Co-integration
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Abdelaziz, T. (2004). Unemployment in Algeria: Sources, underestimation problems and the case for integration with Europe. The Journal of North African Studies, Vol.9, No.3 (Autumn), PP. 19-39.

Andre, M.B. (2008). Verification empirique de la loi d’Okun: Le cas de la RD Congo entre 1960-2000.

Andre, M. B., & Oasis, K. T. (2011). Loi d’Okun en République Démocratique du Congo: Evidences empiriques. Revue Congolaise d’Economie. Volume 6, N 1, Avril, PP. 16-41.

Blackley, P. R. (1991). The measurement and determination of Okun's law: Evidence from the state economies. Journal of Macroeconomics. 13 (Fall) pp 641-656.

Dmodr N. G. (2003). Basic econometrics, Mc Grw-Hell/Irwin, 4 th Edition, New Yroks, PP. 191-194. Available at: http://www.scribd.com/doc/6327400/Basic-Econometrics-by-Gujarati-4th-Edition.

Fuad, M. K. (2011). Economic growth and unemployment: An empirical analysis. Journal of Social Sciences, Turkey. 7 (2), PP. 228-231.

Gary, S. (1974). Okun’s law revisited. Cowles Foundaion for Rechearch in Economics at Yale University, Paper N 380, October 22. Available at: http://cowles.econ.yale.edu/P/cd/d03b/d0380.pdf

Geidenhuys, J., & Marinkov, M. (2007). Robust estimates of Okun’s coefficient for South Africa. Working Paper. Available at: http//www.econrsa.org/papers/w_papers/wp55.pdf.

Hamad, A. A. (2003). The relation between economic growth and employment in Saudi private firms. Saudi Economic Association. Economic studies, vol 5, (9). King Saud University.

Heba, S. (2010). Estimating potential and output gap for Egypt using several Approaches. Central Bank of Egypt. Economic Reviews, PP. 1-24.

Huang, H., & Lin S. C. (2008). Smooth-time-varying Okun’s coefficients. Economic Modelling. 25, PP.363-375.

Ikram, D. (2011). Economic transition and happiness and life satisfaction in Algeria, Egypt and Morocco. A thesis submitted for the degree of Doctor of Philosophy. School of Social Sciences Brunel University.

Imad A. M. (2008). Economic growth and unemployment in Arab countries: Is Okun’s law valid? Journal of Development and Economic Policies. Vol. 10, No. 2, PP. 4-25.

Kaufman, R.T. (1988). An international comparison of Okun's laws. Journal of Comparative Economics, 12 (June), PP182-203.

Knoester, A. (1986). Okun’s law revisited. Weltwirtschaftliches Archiv. 122 (1986), PP. 657–665.

Knotek, E. S. (2007). How useful is Okun’s law? Economic Review, 4th Quarter, PP. 73-103.

Lahcen, A. (2010). Trading high unemployment for bad jobs employment challenges in the Maghreb. Carnegie PAPERS, Carnegie Middle East Center, N. 23. June. Available at: http://carnegie-mec.org/publications/?fa=41213.

Luisa, S., & Kurt Vo. L. (2010). NAIRU and Okun’s law: The macro-economy in a nutshell? Final report, European Commission, Directorate General for Employment, Social Affairs and Equal Opportunities, Munich, 22 June.

Mdu, B., & Lumengo, B. B. (2007). South Africa's growth paradox. DEGIT Conference Papers c012_043, DEGIT, Dynamics, Economic Growth, and International Trade. Available at: http://www.degit.ifw-kiel.de/papers/degit_12/C012_043.pdf.

Mohamed, A.C. (2003). What macroeconomics factors explain Algeria’s poor economic growth performance? Background Paper for the GDN Global Research Project on explaining Growth in Developing Countries: The Case of Algeria. Available at: http://depot.gdnet.org/gdnshare/pdf2/gdn_library/global_research_projects/explaining_growth/Algeria_growth_final.pdf .

Mohamed Ibrahim El-Sakka (2009). The use of oil revenues: the case of the State of Kuwait, Development Series, Issue 33, Arab Planning Institute. 2009.

Prachowny, Martin F. J. (1993). Okun's law: Theoretical foundations and revised estimates. The Review of Economics and Statistics. 75(2), PP. 331-336.

R. Jbir & S. Zouari-Ghorbel (2011). Oil price and dutch disease: The case of Algeria. Energy Sources, Part B: Economics, Planning, and Policy, 6:3, PP. 280-293.