Application of Okun’s law on Nigerian Economy: evidence from spatial econometrics analysis

Abstract

Spatial econometrics should be viewed in a wide sense involving developments of models and statistical tools for the analysis of externalities, spillovers, interactions etc., in various areas including economics, geography and regional science, etc. This study examined application of Okun’s law on the Nigerian Economy using 2018 cross-sectional data of Gross Domestic product (GDP) and unemployment rate data sourced from the National Bureau of Statistics (NBS), Nigeria and from an economics website. In economics, Okun’s law is an empirically observed relationship between unemployment rate and GDP of any country. Results from the Ordinary Least Squares (OLS) reveal that there is positive relationship between unemployment rate and GDP in Nigeria though not significant while autocorrelation is present in the estimated model at 5% level of significance. The Moran I statistic for spatial autocorrelation test is significant at 5% while the Monte-Carlo simulation of Moran I statistic at 10,000 simulations revealed the presence of spatial autocorrelation at 5% level of significant. The following spatial models namely: Spatial Lag Model (SLM), Spatial Error Model (SEM) and Spatial Autoregressive with autoregressive error structure (SARAR) were applied in this study. In addition, result from Spatial Lag Model shows a unit increase in GDP leads to an increase of 0.0497 with increase in Unemployment rate in Nigeria. In addition, a unit increase of GDP in one state of Nigeria produces a total impact of increment of 0.1306 in Unemployment rate. The findings contradict Okun’s Law but the relationship is not significant in the case of the Nigerian Economy.