The nexus between unemployment and economic growth in Serbia: Does Okun's law hold?

Abstract

Starting from the empirically-based postulate that economic growth, through increasing labour demand and employment, reduces the unemployment rate, this study investigates the relationship between real GDP growth and the unemployment rate in the Republic of Serbia. The analysis is motivated by the fact that the unemployment rate in Serbia has significantly decreased over the last decade (especially after 2014), despite relatively modest rates of economic growth. These tendencies indicate the possibility of a nonlinear (asymmetric) relationship between the two variables, which has important implications for designing a more efficient economic and employment policy. Applying both linear and nonlinear Autoregressive Distributed Lags models (ARDL and NARDL) to quarterly data in the 2008-2019 period reveals that the relationship between economic growth and unemployment rate is negative, as suggested by Okun's law, but also that there is a profound asymmetry in this relationship. Namely, a 1% increase in the real output leads to a 4.74% decrease in the unemployment rate, whereas a decrease in output by the same percentage increases the unemployment rate by only 1.52%. Further analysis, based on investigating the relationship between GDP decomposed by the expenditure and production approach, and the unemployment rate, indicates that Okun's law asymmetry in the economy of Serbia is most affected by domestic demand, primarily private and government expenditures on the products of labour-intensive activities, such as services, agriculture, and industry.