Economic growth and unemployment nexus: empirical test of Okun’s law in Somalia

Abstract
This paper aims to empirically examine the relationship between GDP and unemployment in Somalia from 2000 to 2021. The study also estimates Okun’s coefcient. To evaluate the association between the unemployment rate and economic growth, we employ the Hodrick–Prescott (HP) flter detrending technique, the Augmented Dickey–Fuller (ADF) test, ordinary least squares (OLS), and fully modifed OLS. The
fndings of this study demonstrate that the series is stationary at the level. However, the results confrm a statistically insignifcant negative relationship between unemployment and economic growth. Consequently, our fndings suggest that Okun’s law does not apply in Somalia. For robustness, we employ fully modifed ordinary least squares (FMOLS), canonical cointegrating regression (CCR), and dynamic ordinary least squares (DOLS). Nevertheless, the relationship between the GDP gap and unemployment is not strong enough to be considered statistically signifcant, and other factors may also infuence unemployment. Therefore, policies aimed at reducing unemployment should take into account various factors, including education and training, labor
market regulations, and social protection measures.
Keywords: Okun’s coefcient, Okun’s law, Gap version, Fully Modifed OLS