The Nexus between Unemployment and Economic Growth in Egypt: Revisiting Okun's Law

Abstract

This paper investigates the validity of Okun’s Law to the Egyptian economy through the period 1991 until 2021 using Autoregressive Distributed Lag (ARDL) model technique. The paper applies Augmented Dickey-Fuller (ADF) and Phillips – Perron (PP) to perform the unit root test. It is found that the three variables in the model, natural logarithm of real GDP difference LNRGDPdif, natural logarithm of real GDP gap LNRGDPgap, and natural logarithm of unemployment rate difference LNUNdif, are integrated of order zero I(0). While the other variable, natural logarithm of unemployment rate gap LNUNgap, is integrated of order one I(1). Therefore, the paper finds justification to conduct the ARDL bounds test for co-integration for the two Okun’s Law versions. However, the paper finds that the results are incompatible with economic theory and contradict most of research papers conducted for other countries. The coefficient of LNUNdif is (= 0.0004) and found to be insignificant while the coefficient of (LNRGDPdif (-1)) is the only significant coefficient at 5% significance level (= -2). Of course, these results in addition to the ARDL Bounds Tests’ results give evidence that there is no relationship between real GDP and unemployment rate in Egypt neither in the long run nor in the short run. Therefore, Okun’s Law, with difference model and gap model, is not valid in case of Egypt. These findings can be attributed to the low level of data accuracy and reliability. As a result, it is recommended for the Egyptian government to direct more effort towards collecting and publishing more accurate and reliable data on socio-economic variables.