The Equilibrium Relationship between the Unemployment and the Output

This paper investigates whether the stable relationship between the unemployment rate and the output exists based on the ARDL method developed by PSS (2001). This means that we examine whether Okun's law can be established. Unlike Johansson's method, this ARDL method has the advantage of being able to examine whether the cointegration relationship of variables is established even if all related variables do not need to have the same difference structure. The ARDL method is considered to be more suitable for our research purposes because the unemployment rate among the data used in this study was I(1) process during the sample period while the economic growth rate was a I(0) process. According to the theoretical literatures, the stable relationship between these two variables is assumed to exist. The results of our paper show that there is a stable relationship between the unemployment rate and the economic growth rate in the Korean economy empirically. This means that the Okun's law can be applied to derive the aggregate supply curve. However, while this study focused on the relationship between unemployment and economic growth using only this two variables, it is necessary to establish Okun's law in an expanded form that includes variables directly related to economic growth, such as labor productivity.