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The True Estimations of China’s Unemployment and the Re-examination of Okun’s Law

Author: ZhaoHaiRui
Tutor: XieXiaoYan
School: Southwestern University of Finance and Economics
Course: Statistics
Keywords: real urban unemployment rate Okun’s law structural factors co-integration techniques error correction model
CLC: F224
Type: Master's thesis
Year: 2011
Downloads: 54
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In macroeconomics there is a law that is called Okun’s law. Okun, in 1962, found the empirical relationship between the unemployment rate and the economic growth, that is, when real GDP growth relative to potential GDP by 2%, the unemployment rate will decrease about 1%. Since Okun’s law was found, economists got strong interest in it’s use of different market economies, and empirical results are mostly positive to the widespread presence of Okun’s law. Especially in western countries, Okun’s law is considered to have almost universal applicability.But the study of most of scholars in China showed that Okun’s law does not hold in our country. With China’s sustained rapid economic growth, unemployment is rising, and this is the scholars have often referred to as the co-existence phenomenon of "high growth, high unemployment ". In the particular context of our economy, there is more complex factors that influenced unemployment rate. That domestic scholars have failed to test Okun’s law in China’s should due to the assumption in Okun’s Law. To sum up, the implicit premise of Okun’s law as follows. (1) developed a single market mechanism; (2) the relative scarcity of labor resources; (3) there is no hidden unemployment; (5) population growth rate fixed. But the actual situations in our country show that these four conditions are not met. First of all, with our large population base, labor resources are not scarce. Second, China is a mixed economy, the market mechanism does not play a sufficient role. Third, the low level of openess of unemployment, that is rural and urban areas exist in hidden unemployment; in fact,town hidden unemployment due to institutional reform such as the laid-off workers released from it should be considered unemployed. Fourth, there are a lot of labors that shifted from rural to urban.Most previous studies used the registered urban unemployment rate, but its flaws are obvious, neither consider the unemployment rate of urban migrants (mainly from the transfer of rural labor force); and to the urban unemployment rate itself, nor would the laid-off workers as the form of hidden unemployment be considered. Therefore, accurate estimation of urban unemployment rate is very important, In respect of the inspection process, the previous studies did often not considered (or appropriate to consider) many a factors that affect the rate of unemployment in the process of economic transformation, so early measurement methods may also be insufficient. This thesis attempts to get support from the data (real urban unemployment rate estimation) and to consider China’s economic structure and transformation characteristics of the dual use of two measurement techniques suitable for re-examination of the Okun’s Law.The full thesis is divided into 5 chapters:The first chapter is an introduction section. The chapter first proposed the research background and significance. Then describes the ideas, structure, organization and research methods and the could-be innovative point of this thesis.The second chapter is a basic section of the thesis. Firstly, make a more detailed documentation on the calculation methods of the domestic unemployment rate, and the examination of Okun’s law in China, in order to summarizes the empirical evidence of domestic relevant conclusions that were drawn.The third chapter is the first core. The first section examines the shortcomings of the registered urban unemployment rate, and using a simple but more effective method for estimating (based on the Yearbook data, direct estimation method) to estimate the true urban unemployment rate from 1978 to 2009. Section II briefly discusses the employment elasticity, indicating that China’s economic growth made contribution to employment growth. Section III discussed in more detail the practicality of Okun’s law in our country, and makes respectively an OLS estimation and another estimation by adding dummy variables for OLS regression of the samples to verify the establishment of Okun’s law in our country. Among them, adding dummy variables to OLS estimation dues to the urban and rural labor transfer reaction caused by the evolution of the labor distribution structure and economic reform and transformation characteristics.The fourth chapter is the second core. It further in-depth analysis Okun’s law on the basis of different factors that influenced the unemployment rate. Section I elaborates the factors that affect the real urban unemployment rate, and select the appropriate variables. SectionⅡconsiders two structural factors (the distribution of urban and rural labors and the related changes in employment structure caused by the change of ownership structures), and re-inspects Okun’s law by OLS regression. In SectionⅢ, based on a co-integration model that includes the two structural factors, the real long-term equilibrium relationship between urban unemployment rate is made, and the builds an error correction model to explore "partially substantiated" evidences of Okun’s law in our country. When the distribution of urban and rural labor force structure, and ownership changes in the structure of employment-related changes are excluded by long-term equilibrium relationship between urban unemployment rate and them, the economic growth does reduce unemployment in the short term, and is significant.Chapter V makes a summary and prospect on the full thesis.The data based on direct estimation of "laid-off workers" of urban units by the Yearbook, leads to a relatively More realistic "real urban unemployment rate" And the "real urban unemployment rate" is largely different from the published "Urban registered unemployment rate" in China.The estimated real urban unemployment rate is employed to the re-inspection of Okun’s law in China. The previous studies employed either registered urban unemployment rate to test Okun’s law, or is obtained by indirect calculation method to test the unemployment rate, or the direct use of census data to test (sample interval is too short) the law, so the test results may be biased or wrong. When using the real urban unemployment rate to test Okun’s law, although the results also not significant, but helped by co-integration techniques that eliminate the long-term relationship between the real urban unemployment rate and the two structural factors that influence the unemployment, we found that partial evidences in Okun’s law can still be found in China.

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