Linking Unemployment to Inflation and Economic Growth: Toward A Better Understanding of Unemployment in the Philippines

Abstract

Unemployment is among the major problems not only in less developed and developing countries but in developed countries as well. It spells out the extent of poverty a household will have to sustain. Strongly influenced by the premises of the Okun’s Law and Phillips Curve, this study sought to determine the link between unemployment and inflation and economic growth. An additional explanatory variable, age dependency ratio, was introduced to investigate this facet of unemployment which is based on the premise that a high age dependency ratio would result to lower unemployment. Unit root tests were employed to the data series prior to testing the hypothesized relationships which employed ordinary least squares (OLS) regression technique. Tests for heteroskedasticity and collinearity were done using White’s test and VIF, respectively. It was found that unemployment is negatively related to inflation and economic growth, confirming Okun’s Law and Philips Curve in the Philippines for the period covering 1980 to 2009. Moreover, age dependency ratio was found to be positively related with unemployment albeit, the relationship is not significant. The coefficient of determination obtained for the model was 72.7% hence overall, the regression line relatively describes the data well.