Academic journal article E+M Ekonomie a Management

Economic Growth and Unemployment Rate of the Transition Country-The Case of the Czech Republic 1996-2009

Academic journal article E+M Ekonomie a Management

Economic Growth and Unemployment Rate of the Transition Country-The Case of the Czech Republic 1996-2009

Article excerpt

Introduction

In early 1960's, the economist Arthur Okun documented the negative correlation between the GDP growth and change in the unemployment rate. This relationship explains how the level of activity in the labor market affects the activity in the goods market during the business cycle. Number of empirical studies proved that this relation records persistency in results over the long-term period. This relationship is now called Okun's law and is cited in various macroeconomic textbooks. Students of macroeconomic courses learn that for every 1 percent excess of the natural unemployment rate, a 2-3% GDP gap is predicted. These estimations are based on empirical analysis from the data of US economy. These estimates are changing slightly through the time --they record a decline in a magnitude. For example, Okun, in his original article [6] predicted that each percentage point of real output growth above 4 percent was associated with a fall in the unemployment rate of 0.07 percentage point [5], while estimates based on data from more recent days show predicted 2% decrease in output for every 1% increase in unemployment [1]. Moreover, the relation in Okun's law embodies a high asymmetry--the short-run effects of positive cyclical unemployment are different from the negative effects [8]. The study of the Okun's law has been attracting many economists not only because of its robustness, but also because this rule together with the Phillips curve helps to model the aggregate supply curve.

Since 1989, the former Czechoslovakia and later the Czech Republic changed from a socialist country to the country based on democratic principles. The economy of the Czech Republic changed from the planned economy with full official employment to the western-type economy based on the free-market principles. Now, the Czech Republic, as a member of the European Union, is based on the same principles as other west-European countries and the USA. Even though the regulations of free market are a bit stronger in the EU than in the USA, the basic relations between macroeconomic indicators have to be similar. Hence, the comparison of Okun's law estimates is the main objective of this analysis.

The main aim of this paper is to compare estimations and results for Okun's law relation coefficients of the Czech economy 1996-2009 with coefficients for economies of the US and France. These countries were chosen to compare the most discussed US economy with France as a representative of a western-European type of economy and the Czech Republic as a representative economy of a transition country. The analysis is based on two principles--the difference version and the dynamic version of the Okun's law. This paper is organized as follows: The next part is devoted to the explanation of relations between the economic growth and the unemployment rate. Data description and results of analysis are given in the third and fourth part, followed by the discussion, conclusion and the list of references.

1. Relations between the Economic Growth and the Unemployment Rate

The basic relationship between the economic growth and the unemployment rate is called Okun's law. The rule that links the increase in the economic growth with the decrease in the unemployment rate was introduced by Arthur M. Okun in his 1962 paper "Potential GNP: Its Measurement and Significance" [4]. From that time, "... Okun's law has been readily accepted as an obvious regularity that did not require formal hypothesis testing ..." [7]. In general, there are three main ways to interpret the Okun's law--the gap version, the difference version and the dynamic version.

The gap version of the Okun's law was originally derived from a production function [7]:

Y = T[(KC).sup.[alpha]] [(NH).sup.[beta]] (1)

where Y represents the level of output, K is the capital input and C is its utilization rate. N and H represent number of workers and hours they work, T represents the technology factor, and a, [beta] are input elasticities. …

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