ANALYSIS OF OKUN’S REGULARITY: THE CASE OF BOSNIA AND HERZEGOVINA

Abstract

Economic growth, or, more precisely, GDP growth rate (Y) is the key macroeconomic indicator.
Positive tendencies of GDP growth (r) mostly impact the economic welfare of the national economy.
Hence, output is analysed in combination with other macroeconomic aggregates and indicators:
investments, inflation, unemployment, trade exchange and the like. In the context of researching the
relation between GDP trends and unemployment rate, A.M. Okun was the first to notice regularity
between these variables. Okun’s law shows the direction and strength of GDP changes under the
influence of (un)employment and represents functional relation between the output market and
labour market. This paper aims to prove that, to a certain extent, there exists Okun’s regularity in
Bosnian and Herzegovinian economy for the period of 2000-2019. The results of linear regression
analysis show that there is negative correlation (R=0,451) between variables Y (output) and X
(unemployment). Determination coefficient R2 = 0,204 indicates that 20,4% variations in GDP is
determined by the changes in unemployment. Coefficient β in linear regression equation is negative,
amounting to -0,596, which means that a change in unemployment by 1 percentile point brings about
an inverse change in GDP by approximately 0,6 units. Variable direction indicates that there exists
Okun’s regularity, though with significantly weaker intensity among the variables. This proves the
hypothesis that there is a negative functional relation between the output market and labour market
in Bosnia and Herzegovina.