An empirical analysis of Okun's law in the Philippines using a production function model

• Main Authors: Balmelero, Kathleen Joi E., Fajardo, James Charis G., Ortizo, Jasmine M., Panganiban, Maribeth L.
• Format: text
• Language: English
• Published: Animo Repository 2006
• Subjects: Unemployment > Philippines; Production functions (Economic theory); Gross domestic product > Philippines; Input-output analysis; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14359
• Institution: De La Salle University

Arthur Okun's [1962] initial study uncovered the underlying negative relationship between the United States' output and unemployment. Okun's study paved the way for the establishment of one of the most stable macroeconomic relationships known as Okun's Law, which states that a for every one percentage point increase of the unemployment rate above its natural rate, there is a corresponding 3 point percentage decrease in real GNP. Presently, the stability of Okun's coefficient is questioned and several studies have uncovered that the coefficient may vary across time. This study offers an initial insight of the Okun's coefficient in the Philippines. Using quarterly data of unemployment, real GDP, labor hours, labor force and capacity utilization from 1988 - 2000, and employing the Prachowny's [1993] production function model, this study revealed that the negative relationship between output and employment in the Philippines holds true and the Okun's coefficient is 0.28. In particular, for every 1-percentage point increase in the employment rate above its natural rate, there is a corresponding 0.28 percentage point decrease in the Philippines' real GDP. The study also uncovered that factors like the average weekly labor hours, labor force and capacity utilization rates significantly affect the measurement of output. Future researchers may want to verify the coefficient generated in this study by employing other production function models and including other variables that may affect output through unemployment.