Unemployment and output in India: An examination of Okun’s law

Abstract

This study discusses the importance of Okun’s law in India by examining the relationship between unemployment and output across various states from 1993 to 2011. A panel data framework using fixed and random effects models is applied on state-level data collected from the National Sample Survey Office (NSSO) and the Central Statistical Office (CSO). The unit root tests and robustness checks, such as the Hausman test and the use of heteroskedasticity-consistent errors, validate the dependability of the findings. The estimated Okun coefficient of –0.12 indicates that a 1% increase in GDP results in a mere 0.12% reduction in unemployment, which is significantly lower than what is observed in advanced economies. This weak relationship highlights India's phenomenon of jobless growth, influenced by structural rigidities, the prevalence of informal employment, and skill mismatches throughout the study period. The findings suggest that economic growth by itself does not guarantee widespread employment, underscoring the necessity for additional policies like promoting labour-intensive industries, aiding small businesses, and enhancing workforce skills.