Unemployment and output dynamics in CIS countries: Okun's law revisited

Okun’s law is a well-known relationship between the change in the unemployment rate and output growth. The main objective of the study is to provide a rigorous econometric analysis of Okun’s law for several CIS countries using different models and econometric methods. The paper further focuses on the analysis of the behavior of unemployment and Gross Domestic Product in Russia, Belarus, Kazakhstan, Moldova, Ukraine and Uzbekistan in different periods of their economic development during 2000-2010. The traditional approach to Okun’s law estimation using OLS regressions does not account for possible endogeneity of regressors and the implied inconsistency of the estimates obtained. These problems point out to incorrectness of applications of the standard OLS estimation techniques. Our study addresses these issues by using econometrically justified instrumental variable regression methods. The report provides the results and discussions on the practical use of Okun’s relationships for evaluation of average effects of economic growth on the unemployment rate, and vice versa; importance of accounting for confidence intervals in applications of Okun’s models to economic development analysis and cross-country comparisons; as well as those on the value of the models for economic forecasting and policy decisions. We also discuss in detail the results of formal econometric tests and economic motivation for validity of instrumental variables used in the study. The formal econometric tests, together with economic arguments, allow us to determine the most appropriate Okun-type models for each of the CIS countries under consideration.