Unemployment and its Impact on Economic Growth in the European Union: An Evidence from Panel Data Analysis

Unemployment and its Impact on Economic Growth in the European Union: An Evidence from Panel Data Analysis

Murat Cetin, Davuthan Gunaydın, Hakan Cavlak, Birol Topcu
Copyright: © 2015 |Pages: 11
DOI: 10.4018/978-1-4666-7308-3.ch002
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Abstract

Unemployment has become an increasingly serious economic and social problem in many European countries. Theoretically, unemployment has a negative effect on economic growth and development. This chapter examines the impact of unemployment on economic growth in 15 EU countries from 1984 to 2012 by using several panel data techniques. Panel unit root tests suggest that the series employed in the study are stationary at first differences. In other words, the series are integrated of order one, I(1). Panel cointegration tests show that the variables are cointegrated over the period implying a long-run relationship between the variables. Panel OLS estimations show that the impact of unemployment on economic growth is negative and statistically significant. This indicates that unemployment decreases economic growth in these countries. Finally, Granger causality tests based on vector error correction model suggest that there is a bi-directional causality between the variables in the short and long run. The findings may provide some policy implications.
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Literature Review

The law developed by Okun (1962) implies the presence of an inverse link between the unemployment rate and real GDP. Basically, Okun (1962)’s law states that a one percentage point change in unemployment rate reveals three percent inverse change in the real output. Therefore, Okun’s law suggests a statistical relationship between unemployment and economic growth. In the next section, the specifications used by Okun will be explained in detail.

Empirically, a number of studies have investigated the relationship between unemployment and real output (Freeman, 2001; Christopoulos, 2004; Adanu, 2005; Huang & Lin, 2008; Villaverde & Maza, 2009; Ceylan & Sahin, 2010; Tatoglu, 2011; Dogru, 2013; Elshamy, 2013). Using panel seemengly unrelated regressions, Freeman (2001) try to analyze the Okun’s law for 10 industrialized countries during the period 1962-1995. In this study, the evidences supporting the validity of Okun’s law are found in all countries.

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