An empirical analysis of Okun's laws in ASEAN using time-varying parameter model

Abstract

This study revisits Okun's law for the ASEAN-6. We apply a time-varying parameter model to simultaneously consider nonlinearity and asymmetric characteristics of Okun's law. The result shows that Okun's law does not hold in other countries except Thailand, Philippines, and Malaysia. That is because FDI plays an important role in economic growth, and the shortage of skilled workers and the surplus of unskilled workers coexist. On the other hand, Okun's law is statistically valid for Thailand, Malaysia, and the Philippines. These countries have a low unemployment rate because of the characteristics of labor market. In addition, the detrend GDP shows a similar pattern to the time-varying coefficient. This indicates that the negative relationship between the unemployment rate and the output strengthens in the recession period because the economic growth in ASEAN-6 countries highly depends on foreign investment. (C) 2019 Elsevier B.V. All rights reserved.