Testing the validity of Okun’s law across five African countries

Abstract

This research aims to focus on the dynamic linkage between economic growth and unemployment in the following African countries: Kenya, Nigeria, the Republic of Congo, Egypt, and South Africa; empirically test the validity of Okun's Law in such contexts. In so doing, this study notes that the applied model, the Panel ARDL model, comes under the consideration of time. However, despite this significant GDP growth, these economies continue to suffer from high unemployment, with relatively high levels of youth unemployment. This has led to questions on the adequacy of high economic growth as a panacea to unemployment. This paper will further examine the effect of Foreign Direct Investment, inflation, and population growth on unemployment. In essence, this paper seeks to inform policy in coming up with more effective ways of reducing unemployment amidst striving for sustained economic growth in these diverse African economies. The study finds limited support for Okun’s Law across the selected countries, indicating that GDP growth has minimal impact on reducing unemployment rates. The other independent variables FDI, inflation and population growth illustrate varying effects. In particular, population growth rate significantly impacts unemployment in Egypt, suggesting the need for population management initiatives. Furthermore, FDI has a stronger impact in South Africa and Kenya, highlighting its importance in reducing the unemployment rate. Moreover, inflation impacts unemployment in Nigeria increasing costs for business and the livelihood of Nigerians, while structural challenges on governance and policy inefficiencies make it difficult for both Nigeria and the Republic of Congo to transfer economic growth with job creation. The policy recommendations include enhancing youth employment initiatives, inclusive growth policies, improving governance and region-specific labour strategies to foster an urban-rural landscape.