Economic Activity and Unemployment Dynamics in Turkey

Abstract

Stylized Business Cycle facts show that employment is highly procyclical and unemployment is highly countercyclical with the aggregate economic activity. Also, Okun's law indicates a negative relationship with between economic growth and unemployment rate. This paper's goal is to find out what causes high unemployment and what is the relationship between economic growth and unemployment in Turkey. It aims to show not only the relationship between cyclical output and unemployment, but also how the changes in GDP gap affect the unemployment. Further, it analyzes whether the relationship between GDP gap and Unemployment is symmetric. The results of the Granger causality test indicate that there is a unidirectional causality from GDP gap to Unemployment. Also, impulse response and Variance decompositions show that following the crises, although there is a strong and quick recovery in economic activity, but same recovery is not seen in employment and in the reduction of unemployment rate. This can be seen as a typical indication of jobless growth phenomena. The paper also discusses the micro and macro policy measures for reducing unemployment.