An empirical analysis on the determinants of Okun's coefficients, labour market regulation and the sectoral Okun's law in oil-dependent countries

Abstract

The motivation for this dissertation revolves around the issues of over-dependency on oil and labour regulation roles in the unemployment rate among oil-producing countries. Oil dependence, as a main factor in driving economic growth, undoubtedly plays a crucial role in determining labour market outcomes. This study aims to achieve three objectives. The first objective is to estimate the determinants of Okun’s coefficient in various oil-dependent countries. Firstly, the present research estimated Okun’s coefficients using rolling window technique. Then, the estimated Okun’s coefficients in the previous step became the dependent variable in the second step. The second objective is to examine the impact of labour market regulations on the unemployment rate in oil-producing countries. This study integrates labour regulations and output to explain the impact of these regulations on the unemployment rate. The third objective is to estimate the sectoral level of Okun’s coefficient in oil-producing countries; and to provide a new link between the “Dutch disease” and the sectoral specification of Okun’s law. To achieve the research objectives, the panel corrected standard errors (PCSE), and the panel autoregressive distributed lag (ARDL) estimators are employed. This research found a positive association between oil dependence and Okun’s coefficients, suggesting that higher levels of oil dependence have the potential to influence Okun’s coefficients. In particular, the higher the oil dependence, the less negative Okun’s coefficient becomes. Furthermore, the findings show that in oil-producing countries, more flexible labour markets are associated with higher unemployment rates. This finding was only confirmed in the PCSE estimation result. However, both results indicated that increased GDP growth in more flexible labour regulations is associated with higher unemployment rates. In addition, this study also indicated substantial differences in Okun’s coefficient among economic sectors. These findings confirmed that oil rents play a significant role in explaining the different impacts of sectoral output growth on the unemployment rate among oil-producing countries. The implications of these findings conclude with clear evidence for policymakers about the role of oil dependency in economic performance. The governments of these countries should pay attention to the structural reforms that enhance the development of the non-oil sector and improve the incentives for workers to promote employment in other economic sectors. Policymakers in oil-producing countries should ensure fiscal inducements to encourage firms to hire youth with permanent contracts. Therefore, the implementation of labour market regulations, whether more flexible regulations are needed, and they should be under consideration to shape the overall economic conditions. Policymakers in oil-producing countries need to consider the manufacturing and agriculture sectors as key to their policy agenda to gain additional benefits, support and strengthen all economic sectors. Governments should implement an effective labour policy to ensure that each economic sector effectively contributes to the decrease of unemployment.