The Relationship Between Unemployment and Economic Growth in Libya: Testing Okun's Law During the Period 1991–2023

Abstract

The Libyan economy suffers from a dual predicament characterized by sharp fluctuations in economic growth rates coupled with chronically elevated unemployment levels, with unemployment standing as one of the most prominent and pressing challenges confronting the Libyan economy. Accordingly, this study seeks to measure and analyze the relationship between unemployment and economic growth in Libya over the period 1991–2023. To achieve this objective, the study employs real gross domestic product in Libya as a proxy for economic growth and examines its effect on unemployment rates in light of Okun's Law, testing the extent to which this law holds between the two variables within the Libyan economy. The study adopts a quantitative (econometric) approach through the Nonlinear Autoregressive Distributed Lag (NARDL) model in order to identify the positive shocks (effects) and negative shocks (effects) of output on unemployment rates in both the short and long run.

The study arrives at several findings, the most significant of which is an inverse relationship between economic growth and unemployment, confirming the applicability of Okun's Law to these two variables within the Libyan economy in the long run. Specifically, a positive shock (increase) in gross domestic product of 1% is associated with a decline in the unemployment rate of 0.0378%, whereas a negative shock (decrease) in gross domestic product of 1% is associated with an increase in the unemployment rate of 0.0347%.

In light of these findings, the study puts forward a number of recommendations, foremost among them the necessity of directing economic policy toward channeling investment into labor-intensive sectors, supporting the private sector as a gradual alternative to government employment tied to oil revenues, and aligning the outputs of higher and technical education with the actual requirements of the labor market.