Empirical Evidence of Okun’s Law in the Philippine Economy: A Cointegration Analysis

This study investigates the influence of relevant macroeconomic variables on unemployment in the Philippines. Specifically, it aims to: find a coefficient that would characterize the relationship of the between unemployment and GDP using a standard cointegration approach; investigate relevant macroeconomic factors that may affect unemployment; and draw economic and policy implications that will guide policymakers in crafting public policies in improving employment generation. It used quarterly time series data from the first quarter of 1989 to fourth quarter of 2004. Cointegration test was used to determine the long-run relationship while an error correction was employed to determine the short-run behavior of the data. Results of the study reveals that in the long-run a 1% increase in GDP is associated with a reduction in unemployment by 0.7%. While in the short-run, GDP has a larger effect on cutting unemployment; an increase in GDP by 1% results to a decrease in unemployment by 0.95%. Thus there is evidence to indicate that Okun's law is relevant in the Philippine economy. The sectoral analysis shows that the economy's industrial and agriculture sectors are found to have a negative effect on the general unemployment level. However, the service sector on the other has a positive effect, implying that as its output grows, unemployment tends to rise as well. This is probably due to job and skills mismatch in the service sector which leads to structural unemployment. It is recommended that the industry sector be prioritized especially the manufacturing and construction subsectors, in the development planning process.