Extending the Cobb–Douglas Production Function with Okun’s Law: Empirical Evidence from Mongolia
Abstract:
This paper develops an integrated framework that extends the classical Cobb–Douglas production function by embedding Okun’s Law to examine the role of unemployment in output determination. While the standard Cobb Douglas model explains output through capital, labor, and technology, it abstracts from cyclical labor-market slack, which may be particularly relevant in small, export- dependent economies. We propose an augmented pro duction specification, Y = AKαLβU−γ, and estimate it using annual macroeconomic data for Mongolia over the period 2010–2024, drawn from the World Bank and national statistical sources. The empirical results indicate that labor input is the dominant determinant of output in long- run production relationships, while capital for mation exhibits a positive but statistically insignificant effect. Incorporating unemployment into the level-based production function does not yield a sta- tistically significant impact on output once labor input is controlled for. Estimation of Okun’s Law in first differences reveals a negative but small and statistically insignificant rela tionship between output growth and changes in unemployment, suggesting weak short-run labor-market trans mission. Overall, the findings imply that Okun-type dynamics in Mongolia are substantially weaker than those observed in advanced economies, reflecting the dominant influence of external commodity cycles and gradual labor-market adjustment.
