Introduction

Okun’s Law suggests that higher economic growth is associated with lower unemployment. This study examines whether Okun’s Law holds in India using annual GDP growth and unemployment data obtained from the World Bank.

Load Libraries

library(lmtest)
library(readxl)
library(dplyr)
library(ggplot2)

Import Data

unemp <- read_excel(
  "C:/Users/harsh/Downloads/API_SL.UEM.TOTL.ZS_DS2_en_excel_v2_3294.xls",
  sheet = "Data",
  skip = 3
)

gdp <- read_excel(
  "C:/Users/harsh/Downloads/API_NY.GDP.MKTP.KD.ZG_DS2_en_excel_v2_4143.xls",
  sheet = "Data",
  skip = 3
)

Filter India Data

unemp_india <- unemp %>%
  filter(`Country Name` == "India")

gdp_india <- gdp %>%
  filter(`Country Name` == "India")

Create Dataset

years <- as.character(1991:2024)

unemployment <- as.numeric(unemp_india[, years])
gdp_growth <- as.numeric(gdp_india[, years])

data_okun <- data.frame(
  Year = 1991:2024,
  Unemployment = unemployment,
  GDP_Growth = gdp_growth
)

data_okun <- na.omit(data_okun)

head(data_okun)
##   Year Unemployment GDP_Growth
## 1 1991        7.641   1.056831
## 2 1992        7.649   5.482396
## 3 1993        7.662   4.750776
## 4 1994        7.593   6.658924
## 5 1995        7.570   7.574492
## 6 1996        7.537   7.549522

Descriptive Statistics

summary(data_okun)
##       Year       Unemployment     GDP_Growth    
##  Min.   :1991   Min.   :4.172   Min.   :-5.778  
##  1st Qu.:1999   1st Qu.:7.564   1st Qu.: 4.928  
##  Median :2008   Median :7.610   Median : 6.947  
##  Mean   :2008   Mean   :7.268   Mean   : 6.094  
##  3rd Qu.:2016   3rd Qu.:7.640   3rd Qu.: 7.862  
##  Max.   :2024   Max.   :7.859   Max.   : 9.690

GDP Growth Trend in India

ggplot(data_okun,
       aes(x = Year,
           y = GDP_Growth)) +
  geom_line() +
  geom_point() +
  labs(
    title = "GDP Growth Rate in India",
    x = "Year",
    y = "GDP Growth (%)"
  )

Unemployment Trend in India

ggplot(data_okun,
       aes(x = Year,
           y = Unemployment)) +
  geom_line() +
  geom_point() +
  labs(
    title = "Unemployment Rate in India",
    x = "Year",
    y = "Unemployment Rate (%)"
  )

Scatter Plot

ggplot(data_okun,
       aes(x = GDP_Growth,
           y = Unemployment)) +
  geom_point(size = 3) +
  geom_smooth(method = "lm") +
  labs(
    title = "Okun's Law in India",
    x = "GDP Growth (%)",
    y = "Unemployment Rate (%)"
  )
## `geom_smooth()` using formula = 'y ~ x'

Correlation Analysis

correlation <- cor(
  data_okun$GDP_Growth,
  data_okun$Unemployment
)

correlation
## [1] -0.1910327

Regression Model

okun_model <- lm(
  Unemployment ~ GDP_Growth,
  data = data_okun
)

summary(okun_model)
## 
## Call:
## lm(formula = Unemployment ~ GDP_Growth, data = data_okun)
## 
## Residuals:
##     Min      1Q  Median      3Q     Max 
## -3.0298  0.1748  0.3518  0.4249  0.5184 
## 
## Coefficients:
##             Estimate Std. Error t value Pr(>|t|)    
## (Intercept)  7.66085    0.39285  19.501   <2e-16 ***
## GDP_Growth  -0.06452    0.05860  -1.101    0.279    
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 0.9543 on 32 degrees of freedom
## Multiple R-squared:  0.03649,    Adjusted R-squared:  0.006384 
## F-statistic: 1.212 on 1 and 32 DF,  p-value: 0.2791

Interpretation

The coefficient of GDP Growth is expected to be negative according to Okun’s Law. A negative coefficient would imply that higher GDP growth reduces unemployment in India.

Diagnostic Tests

Durbin-Watson Test

dwtest(okun_model)
## 
##  Durbin-Watson test
## 
## data:  okun_model
## DW = 0.21802, p-value = 7.303e-14
## alternative hypothesis: true autocorrelation is greater than 0

Breusch-Pagan Test

bptest(okun_model)
## 
##  studentized Breusch-Pagan test
## 
## data:  okun_model
## BP = 0.73724, df = 1, p-value = 0.3905

Diagnostic Plots

par(mfrow = c(2,2))
plot(okun_model)

Conclusion

This study investigates the relationship between GDP growth and unemployment in India using World Bank data from 1991 to 2024. The results provide evidence regarding the validity of Okun’s Law in India. The sign and significance of the GDP coefficient indicate whether economic growth contributes to reducing unemployment in the Indian economy.

Although GDP growth plays an important role, unemployment in India is also affected by structural factors such as labour force participation, technological changes, demographic shifts and the large informal sector.