A flexible nonlinear inference to Okun’s law for Turkish economy in the last decade

Abstract

The study applies the flexible nonlinear inference approach of James D. Hamilton (2001) to investigate the relationship between cyclical components of unemployment and output in the Turkish economy where the unemployment rate remains at double digits despite the relatively stable economic environment over the last decade. The paper shows that economic expansion and contraction terms have an asymmetric effect on cyclical unemployment in Turkey. Moreover, the study identifies a specific range for the output gap level at which jobless growth pattern occurs in the Turkish economy. According to our findings, contrary to standard literature, cyclical component of unemployment does not decrease even though cyclical component of output is positive and increases in the middle stages of the upswing phase of the economy. This result may also indicate that the employers are reluctant to extend employment and alter into informalization for reasons such as over-valued domestic currency, surplus labour force and/or any rigid regulatory frameworks in the middle stages of the expansion phase of the economy. However, they become eager to expand employment and renounce informalization only after a certain rate of economic growth is achieved.