Has Okun’s Law Become Invalid in China?- Estimation of Potential GDP Growth Rates and Natural Rates of Unemployment Based on Dual Structure

Zou Peijiang

Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China

Abstract: This paper calculates the potential GDP growth rates and the natural rates of unemployment in China using the dual decomposition of the simple Okun’s law. The results show that every 1% increase in China’s urban registered unemployment rate leads to a 1.98% drop of GDP, the potential growth rate of GDP of China is about 10%, and the average natural rate of unemployment is about 3.2% in China in the past three decades. The paper finds that Okun’s law is still valid in China in the long run, but the Okun coefficient is about -3.79, overestimating the impact of the registered unemployment rate on GDP growth, and needs to be corrected based on China’s dual economic structure.
Keywords: Okun’s Law, dual structure, natural rate

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