Extending Okun's Law to encompass the governance-unemployment nexus: New Insights from PMG/ARDL Approach

Abstract

This study has empirically aimed at estimation of the short-and long-term dynamics of financial and institutional factors with respect to unemployment rate in case of the selected developing economies over the period of 1996-2023. The second-generation empirical analysis such as cross-sectional dependence and unit-root analysis support the use of pool mean group regression analysis. The empirical outcomes of pool mean group regression have confirmed the existence of Okun’s law in the influence of a rise of control of corruption, government effectiveness, and political stability to reduce unemployment rate in this region. Among the financial factors, economic growth-unemployment rate nexus significantly validates the existence of Okun’s law. Further a rise of exchange rate is also highly significant to decrease the unemployment rate in this region. However, the negative impact of interest rate and positive effect of broad money growth are surprisingly significant to affect unemployment rate and contradicted to the literature. Surprisingly, the institutional factors are more responsive to unemployment rate comparing with financial indicators. These outcomes suggest important policy implications regarding institutional and financial factors to control unemployment rate in these economies.