Association between Economic Growth and Unemployment Rate in Bangladesh: An Assessment of Okun’s Law

Abstract

The prime objective of this paper is to empirically investigate the association between economic growth and unemployment rate (UR) in Bangladesh. The author has garnered data from the World Development Indicators (WDI) of the World Bank (WB) covering the years 1991 to 2022 with yearly balanced data. The outcome variables, which are UR and economic growth, have been considered for this study with a view to testing and assessing Okun’s law connected with foreign direct investment (FDI) and broad money supply (BMS). In addition, the author has applied some tests for instance, unit root test, lag selection criteria, autoregressive distributed lag (ARDL) bound test, ARDL model, error correction model, Granger causality test (GCT), discrete threshold regression model (DTRM) along with some diagnostic inspections (heteroscedasticity, multicollinearity, auto-correlation, and Ramsey RESET test) for the study. The study's findings show that RGDP, UR, LnFDI, and LnBMS are stationary at mixed levels, I (0) and I (I) which suggests the ARDL bound test. The findings reveal that economic growth declines by 0.817 and 0.748 percent in the short run and long run, respectively, if the unemployment rate rises by 1 percent on average, ceteris paribus. Similarly, an increase in the percentage of economic growth leads to a decrease in the percentage of the unemployment rate in the short run. In addition, GCT indicates that UR and economic growth have a bidirectional association. Furthermore, DTRM indicates that if the unemployment rate exceeds or equals 4.349 percent, economic growth will decrease by 2.334 percent. Contrarily, if the unemployment rate is below 4.349 percent, economic growth will increase by 0.737 percent. All analyses are free from statistical errors. The direction of Okun’s law exists in the economy of Bangladesh during the periods. The findings of this study recommend to policymakers and other concerned authorities to enhance economic growth and reduce the unemployment rate by formulating some strategic policies.

Keywords: 

Economic Growth, Unemployment Rate, Foreign Direct Investment, Broad Money Supply, Okun’s law, Bangladesh Economy

JEL Classification:

E01, E24, E51, and F4

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