The Impact of GDP Structure on the Stability of Okun's Law in Lithuania

This paper provides evidence that the extent to which unemployment rate in Lithuania reacts to the fluctuations in GDP depends on the compositional characteristics of GDP growth. Decomposing GDP growth rate by expenditure approach and estimating simple version of Okun’s law, the evidence provided in this paper points towards the conclusion that the GDP growth driven by labour-intense private consumption contributes the most to a change in the unemployment rate. The elasticity of the unemployment rate to capital-intense exports is generally much lower as compared to the elasticity to the domestic demand components. These conclusions are to a large extent confirmed by the estimates obtained by regressing unemployment on GDP growth disaggregated by production approach. Services, agriculture and especially construction – labour-intense production sectors – contribute much more to change in unemployment as compared to manufacturing, the sector characterised by capital-intensity. Referring to the previous studies, these results provide one possible explanation of the unstable and time-varying relationship between the unemployment rate and fluctuations in GDP in Lithuania.