The validity of Okun's law in Curaҫao

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The validity of Okun's law in Curaҫao

Introduction


A high unemployment rate, especially among youth, is a global concern, particularly in Caribbean countries, including Curaçao. In 2014, Curaçao’s youth and total unemployment rates were 33.2% and 12.6% compared to the Caribbean averages of 24.6% and 10.4% and the world averages of 14.0% and 5.9%, respectively.2 To maximize output and support macroeconomic stability, full employment—a situation where everyone capable of working is able to get a job if they would like to—is a necessary goal. In macroeconomic literature, the relationship between changes in unemployment and output growth is known as Okun’s law or Okun’s rule of thumb because the relationship constitutes an empirical observation. Arthur Okun (Okun, 1962) was the first economist to investigate this relationship in the United States. In his original study, he argued that by increasing output by 3%, unemployment would decrease by 1%. He was, therefore, in favor of output expansion policies to reduce unemployment and poverty (Abbas, 2014). The literature suggests that Okun’s relationship is fairly stable over the long run, but over the short run, the relationship can differ considerably depending on the country and/or time period considered.
This paper contributes to existing macroeconomic literature by examining the validity of Okun’s law in Curaçao based on annual time‐series data. To the authors’ knowledge, no previous studies have been conducted on the applicability of Okun’s law in Curaçao. If indeed a relationship exists between unemployment and output growth in Curaçao, we will be able to estimate the real output growth rate required to reduce the unemployment rate. Although Curaçao’s unemployment rate declined from 13.0% in 2013 to 12.6% in 2014 and to 11.7% in 2015,3 this figure is still relatively high compared to the Caribbean and world averages. Also, while the unemployment rate in Curaçao has been declining in the past two years, real output has been stagnant—contrary to Okun’s law.
The paper is structured as follows. Section 2 elaborates on various types of unemployment as well as existing literature on the relationship between output growth and changes in unemployment. Section 3 discusses the various versions of Okun’s law that exist and that have been used in the studies cited in section 2. Section 4 shows the development of the unemployment and output growth rates in Curaçao. Section 5 outlines the data and method used to investigate the validity of Okun’s law in Curaçao. Section 6 discusses the main empirical results and section 7 presents the conclusions of this study.

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