Asymmetry in Okun’s Law Revisited: New Evidence on the Cyclical Unemployment– Cyclical Output Nexus in the Free State Province (South Africa) Using a Nonlinear ARDL Model - Acta Universitatis Sapientiae

Acta Univ. Sapientiae, Economics and Business, 12 (2024) 203–239

DOI: 10.47745/auseb-2024-0010

Abstract: This paper examines the asymmetric unemployment–output nexus employing the nonlinear autoregressive distributed lag (NARDL) model.Cyclical components of unemployment and real output are estimated from annual data covering 1994–2019, using the Hodrick–Prescott and the Corbae–Ouliaris detrending techniques. Controlling for structural change effects, we find a statistically significant asymmetric cyclical unemployment–cyclical output relationship in the long run and the short run in the Free State province (South Africa), regardless of the detrending method used. Specifically, empirical results show that a one-percent increase in cyclical output can reduce cyclical unemployment between 0.70 and 0.87 percentage points, albeit conditioned on sustained economic growth. Also, the significant long-run coefficients of cyclical output reveal that an economic upturn between 1.88 and 2.03 percent would reduce unemployment by one percent. Based on our findings, proactive implementation of macro-fiscal policies consisting of demand-and-supply-side interventions is required to spur economic growth and lower the prevailing high unemployment rate in the province.

Keywords: Okun’s law, NARDL, Hodrick–Prescott filter, Corbae–Ouliaris filter, South Africa

JEL Classification: C51, E24, E32, J64