An Empirical Assessment of the Okun’s Law Postulation in Nigerian Economy: 1980 - 2015

Abstract

Nigeria’s current economic phenomenon poses far-reaching challenge to the age-old economic postulate that the growth rate of the gross domestic product (GDP) of an economy reduces unemployment. Many attempts have been made to verify this postulate otherwise known as Okun’s Law. However, existing empirical studies on the Nigerian economy have generally focused attention on aggregate output thereby overlooking the disaggregation of output data into major sectors to examine their differential effect on unemployment in the economy. This study therefore, investigates whether Okun’s law holds in the Nigerian economy by examining the short-run and long-run effects of aggregate output on unemployment, and by disaggregating the overall output data in to its major sectoral components to assess their effect on unemployment in Nigeria with time series data spanning 1980-2015. The econometric technique employed in the research is the Autoregressive Distributed Lag (ARDL) bound testing approach. The analysis began with pre-tests for stationarity using Augmented Dickey-Fuller (ADF) unit root tests. Two ARDL models were specified. In the first, bound testing revealed the existence of cointegration between unemployment and GDP growth, and growth of GDP is positively related to unemployment in the long run but a negative relationship was found in the short run. In the disaggregation (i.e the second ARDL model) that examines the various sectors and components of GDP, it was found that there is no long run relationship between unemployment and agriculture, industry, construction, trade, and services. The study therefore recommends among others, the need for forging a link among the primary, secondary and tertiary sectors of the economy, with the agricultural sector linked to the industrial sectors, and technological innovation to reduce reliance on imported manufactured goods, raw materials and spear parts used for industrial and agricultural production so that domestic output growth would be employment elastic.