Abstract
The Okun law states that 1 percentage point GDP growth is associated with 0.5 percentage point reduction of the actual short run unemployment rate.
Estimations on the Cyprus economy reveal that if data is estimated either quarterly or annually GDP has to grow by 2.4 percentage points to reduce the actual unemployment rate by 1 percentage point.
Additionally, if the actual unemployment rate is regressed at t-1 against GDP growth at t, then the Okun coefficient equals to 0.5 percent validating the Okun’s law.
Moreover, by running a two variable OLS regression between the actual unemployment rate at time t and at time t-1 (lag) with the GDP growth at time t, it is found that the summation of Okun’s coefficient equals to -0.38 corroborating the empirical results of Eurozone countries estimated at -0.36.
Expansions are found to have insignificant impact to changes in unemployment, mostly if the unemployment rate is lower than its natural rate. On the other hand, downturns have statistically significant correlation, thereby causing an asymmetric correlation.
