The Validity of Okun's Law in Nigeria: A Difference Model Approach

This paper, empirically, tests the validity of Okun's law in Nigerian economy from 1980-2012. The two versions of the difference model approach of the Okun's law are used even though one of them is frequently used in the literature. We utilize Var-cointegration method and examine the direction of causality using the Var Granger causality/Block Exgeneity Wald test. We find that the trace test statistic demonstrates only one cointegrating vector at 5% level. Both the Var Granger causality/Block Exogeneity Wald test and error correction model provide exactly the same conclusion of a uni-directional causality from unemployment rate to real output growth. However, Okun's coefficient estimates carry positive signs in both models and are infact contrary to unemployment-output relationship even though unemployment rate determines the real output growth in Nigeria but not vice versa from the causality analysis. Therefore a good policy space is needed to create an enabling environment for drastic reduction of unemployment which is a pointer to increasing aggregate demand and output growth in Nigeria in the long run. [PUBLICATION ABSTRACT]