**3. Relationship between growth rate and unemployment: Okun's law**

One of the highlights of the analysis on unemployment is the relationship between growth and unemployment. The main expectation of given the main determinants of economic growth is the unemployment rate decreasing in an economy where the growth is occurring or at the least the current unemployment rate does not increase.

This study shows that the Okun law works very poorly for Turkey. The negative-directional regression line obtained in this study using regression analysis revealed the existence of an inverse relationship between the change in unemployment rate and the growth rate. However growth has an impact on unemployment it must be at least 4.3%. In other words, every %1 point increase after the growth rate reaches this level results in a reduction in the unemployment rate of only %0,13 [18]. It is seen that similar results have been reached in many different studies on Turkey. These calculations indicate that growth in the period of expansion of the conjuncture in particular had very low effects on employment, and hence the presence of non-employment growth. Another important finding obtained in these studies is that the relationship of Okun in the Turkish economy has an asymmetric structure, that is the effect of reducing unemployment during the expansion period of real output and the increasing unemployment during the contraction period are

*Relationship between Economic Growth, Unemployment, Inflation and Current Account…*

When the relationship between the growth rate and the unemployment rate are

Although growth statistics have increased over the years in the Turkish economy, unemployment rates have not decreased in the way predicted by Okun's law. In general accepted theory, when the growth rate of a country's economy increases, it is expected that employment will increase and the unemployment rate will decrease. Despite the high economic growth rates achieved in Turkey in recent years, this performance is not reflected in unemployment rates to the same extent, causing controversy. An economic growth model that depends on consumptionbased foreign capital movements that do not provide employment is not sustainable. Considering the presence of rapid population growth and a demographic structure with a young population, it is of great importance to develop an economic

*Relationship between growth and unemployment rate (2004–2019). Source: Turkish World Bank – TCMB.*

examined in 1999–2019 period in Turkey it is observed that there is an inverse relationship between growth and unemployment, especially during crisis periods. The unemployment rate reached high levels in 1999, 2001 and 2009, and in later years (in some periods) it began to decline, albeit lagging. Similarly, with the negative growth conditions caused by the foreign exchange crisis that took place in 2018, unemployment started to rise and reached its highest value in 2019 with 13.7%. On the other hand, the impact of the cyclical revival in the economy on unemployment remained relatively weak. Despite the growth rate approaching 10% in 2004 and 2005, the unemployment rate remained stable at high levels. It can be said that the decrease in the unemployment rate remained extremely limited in 2011, when the growth rate was the highest in the period studied. In the period of expansion that took place in 2013 and 2017, unemployment did not decrease, but

not same [3].

**Figure 2.**

**291**

rather started to increase (**Figure 2**).

*DOI: http://dx.doi.org/10.5772/intechopen.93833*

In this context, the effects of economic growth on employment or unemployment rate are examined and whether growth creates employment is the subject of research both in the world literature and in Turkey [1]. Historically, it is observed that the relationship between economic growth and employment has weakened or, in other words, become more complex in recent periods. It is observed that there is neither a one-to-one nor a stable relationship between growth and employment, especially with the developments in countries 'economies after [14]. Economists who supported the structural adjustment policy predicted that employment would increase with the liberalization of foreign trade, which is the basis of the exportbased growth strategy. What many developing countries have experienced in recent years is far from confirming these claims of neoclassical theory. In order to ensure adequate employment in an environment where the working age population is increasing at a high pace, growth must be sustained as well as high growth rates. The fact that the growth figures in Turkey have been below minus six percent three times since the 1990s shows that the growth has been extremely unstable. This indicates that the growth due to short-term foreign capital inflows is not permanent and its fragility is high with the liberalization of capital movements [15].

The view that economic growth will lead to increased employment and reduce unemployment is known as Okun's law in the literature. Arthur Okun examined the relationship between the unemployment rate and economic growth in the United States by regression analysis using quarterly data for the period 1947–1960. According to the developed regression equation, the difference between current income and full employment income varies in the opposite direction with the unemployment rate [16]. The law developed by Okun states that if the growth rate exceeds the trend or average growth rate measured at 2.25%, it will lead to a decrease in the unemployment rate. Exactly, the question of how much e ach percentage point of GDP growth that exceeds the growth trend will lower the unemployment rate is being sought. The Okun law can similarly be used to predict the growth rate needed to reduce the unemployment rate by %1 [17]. The study covering the above-mentioned period for the United States concluded that each % 1growth rate over the pre-growth rate reduced the unemployment rate by %0.5 points [18]. The Okun law can be expressed by the following equation;

$$
\Delta \mathbf{u} = \mathbf{k} (\mathbf{y} - \mathbf{y} \ast) \tag{2}
$$

Where Δu is the change in the unemployment rate, y is the growth rate of the product. Y\* in the equation represents the growth trend of real GDP. This ratio varies from country to country. In the years in which the economy performs growth above the natural rate, there will be a change in the unemployment rate to k times the difference between the actual and natural growth rate. Accordingly, the relationship between growth and unemployment for the United States can be written as:

$$
\Delta \mathbf{u} = -\mathbf{0}, \mathbf{5}(\mathbf{y} - \mathbf{2}, \mathbf{25}) \tag{3}
$$

Data covering the period 1975–1995 showed that unemployment decreased by 0.13 percentage points for every %1 point of growth exceeding % 4.3 in Turkey. In this context, the equation of Okun law for Turkey was found as follows:

$$
\Delta \mathbf{u} = -\mathbf{0}, \mathbf{13}(\mathbf{y} - \mathbf{4}, \mathbf{3}) \tag{4}
$$

### *Relationship between Economic Growth, Unemployment, Inflation and Current Account… DOI: http://dx.doi.org/10.5772/intechopen.93833*

This study shows that the Okun law works very poorly for Turkey. The negative-directional regression line obtained in this study using regression analysis revealed the existence of an inverse relationship between the change in unemployment rate and the growth rate. However growth has an impact on unemployment it must be at least 4.3%. In other words, every %1 point increase after the growth rate reaches this level results in a reduction in the unemployment rate of only %0,13 [18]. It is seen that similar results have been reached in many different studies on Turkey. These calculations indicate that growth in the period of expansion of the conjuncture in particular had very low effects on employment, and hence the presence of non-employment growth. Another important finding obtained in these studies is that the relationship of Okun in the Turkish economy has an asymmetric structure, that is the effect of reducing unemployment during the expansion period of real output and the increasing unemployment during the contraction period are not same [3].

When the relationship between the growth rate and the unemployment rate are examined in 1999–2019 period in Turkey it is observed that there is an inverse relationship between growth and unemployment, especially during crisis periods. The unemployment rate reached high levels in 1999, 2001 and 2009, and in later years (in some periods) it began to decline, albeit lagging. Similarly, with the negative growth conditions caused by the foreign exchange crisis that took place in 2018, unemployment started to rise and reached its highest value in 2019 with 13.7%. On the other hand, the impact of the cyclical revival in the economy on unemployment remained relatively weak. Despite the growth rate approaching 10% in 2004 and 2005, the unemployment rate remained stable at high levels. It can be said that the decrease in the unemployment rate remained extremely limited in 2011, when the growth rate was the highest in the period studied. In the period of expansion that took place in 2013 and 2017, unemployment did not decrease, but rather started to increase (**Figure 2**).

Although growth statistics have increased over the years in the Turkish economy, unemployment rates have not decreased in the way predicted by Okun's law. In general accepted theory, when the growth rate of a country's economy increases, it is expected that employment will increase and the unemployment rate will decrease. Despite the high economic growth rates achieved in Turkey in recent years, this performance is not reflected in unemployment rates to the same extent, causing controversy. An economic growth model that depends on consumptionbased foreign capital movements that do not provide employment is not sustainable. Considering the presence of rapid population growth and a demographic structure with a young population, it is of great importance to develop an economic

**Figure 2.** *Relationship between growth and unemployment rate (2004–2019). Source: Turkish World Bank – TCMB.*

determinants of economic growth is the unemployment rate decreasing in an economy where the growth is occurring or at the least the current unemployment rate

*Linear and Non-Linear Financial Econometrics - Theory and Practice*

In this context, the effects of economic growth on employment or unemployment rate are examined and whether growth creates employment is the subject of research both in the world literature and in Turkey [1]. Historically, it is observed that the relationship between economic growth and employment has weakened or, in other words, become more complex in recent periods. It is observed that there is neither a one-to-one nor a stable relationship between growth and employment, especially with the developments in countries 'economies after [14]. Economists who supported the structural adjustment policy predicted that employment would increase with the liberalization of foreign trade, which is the basis of the exportbased growth strategy. What many developing countries have experienced in recent years is far from confirming these claims of neoclassical theory. In order to ensure adequate employment in an environment where the working age population is increasing at a high pace, growth must be sustained as well as high growth rates. The fact that the growth figures in Turkey have been below minus six percent three times since the 1990s shows that the growth has been extremely unstable. This indicates that the growth due to short-term foreign capital inflows is not permanent

and its fragility is high with the liberalization of capital movements [15].

points [18]. The Okun law can be expressed by the following equation;

Where Δu is the change in the unemployment rate, y is the growth rate of the product. Y\* in the equation represents the growth trend of real GDP. This ratio varies from country to country. In the years in which the economy performs growth above the natural rate, there will be a change in the unemployment rate to k times the difference between the actual and natural growth rate. Accordingly, the relationship between growth and unemployment for the United States can be

Data covering the period 1975–1995 showed that unemployment decreased by 0.13 percentage points for every %1 point of growth exceeding % 4.3 in Turkey. In

this context, the equation of Okun law for Turkey was found as follows:

<sup>Δ</sup><sup>u</sup> <sup>¼</sup> k y � <sup>y</sup> <sup>∗</sup> (2)

<sup>Δ</sup><sup>u</sup> ¼ �0, 5 y � 2, 25 (3)

<sup>Δ</sup><sup>u</sup> ¼ �0, 13 y � 4, 3 (4)

The view that economic growth will lead to increased employment and reduce unemployment is known as Okun's law in the literature. Arthur Okun examined the relationship between the unemployment rate and economic growth in the United States by regression analysis using quarterly data for the period 1947–1960. According to the developed regression equation, the difference between current income and full employment income varies in the opposite direction with the unemployment rate [16]. The law developed by Okun states that if the growth rate exceeds the trend or average growth rate measured at 2.25%, it will lead to a decrease in the unemployment rate. Exactly, the question of how much e ach percentage point of GDP growth that exceeds the growth trend will lower the unemployment rate is being sought. The Okun law can similarly be used to predict the growth rate needed to reduce the unemployment rate by %1 [17]. The study covering the above-mentioned period for the United States concluded that each % 1growth rate over the pre-growth rate reduced the unemployment rate by %0.5

does not increase.

written as:

**290**

growth model with policies based on production, providing employment, focused on high value added products and reducing external dependence [17].

there will be current account deficit and the investments for finance to savings are provided from abroad [17]. Within the framework of this identification, for example, a study covering the 1980s for the United States concluded that the current account deficit could be explained by the lack of savings. In other words, the level of domestic investment is being supported by flows of foreign saving. The study also emphasizes that external savings flows are equal to the negative value of the current account balance [22]. The many studies similarly have found that the current account deficit affects the growth rate in Turkey as well. For example, changes in the current account deficit were shown to affect economic growth using the structured VAR method by evaluating the quarterly data in 2002–2014 [23]. The relationship between the current account deficit and growth in Turkey is closely related to the need for Energy (oil), investment goods and intermediate imports, as well as the insufficient savings rate. Turkey's dependence on exports in terms of oil and investment goods is an important factor affecting the reduction of the current account deficit. The realization of investments and therefore growth is linked to the current account deficit through the increase in imports. The consumption expenditures depend mainly on income in the Keynesian approach. Since income growth will affect demand for both domestic and imported goods, it will put a negative pressure on the current account. Thus, in this case, the rate of growth is the independent variable and the current account is the dependent variable, which varies accordingly. The relationship between these two variables is oriented from growth rate to current account balance. The import expenditure represented by M is an increasing function of income in the equality 6. The volume of imports consists of two components such as autonomous and revenue-dependent in the Keynesian model. Hence the total amount of imports varies in the right direction with income depending on the marginal import trend considered constant [24]. İt is observed that the mutual causality relationship is towards growth to current account deficit. **Figure 3** shows the ratio of the current account to GDP ratio and the growth rate

*Relationship between Economic Growth, Unemployment, Inflation and Current Account…*

*DOI: http://dx.doi.org/10.5772/intechopen.93833*

in Turkey over the last 20 years. In the period examined, it is observed that the current account deficit increases during the expansion process and the current account deficit decreases during the contraction periods in Turkey. In addition, the current account balance has been continuously negative except the years 2001 and 2019. Especially when the economy experienced a contraction of close to 6% in 2002, the current account balance was realized at close to 2%. Similar to when the growth ratio reached its highest value (11.1%) the ratio growth to current account to GDP value reached % 8.9 in 2011, when the growth rate was a record it can be considered as an indication of how closely related the growth rate and the current

*Current account balance / GDP and growth rate (1999–2019). Source: OECD.*

account deficit are in Turkey.

**Figure 3.**

**293**
