THE NEXUS OF GROWTH, INFLATION AND UNEMPLOYMENT IN THE WESTERN BALKAN ECONOMIES

Abstract

The economies of the Western Balkan countries have undergone through prolonged economic transition and have been repeatedly exposed to external shocks such as economic crisis, financial crisis, wars and conflicts, and this has also led to macroeconomic crises of this region. In this regard, this study will investigate the nexus of the main macroeconomic indicators, aiming to identify the dynamic interrelationship among real GDP growth, inflation CPI and unemployment. The purpose of the paper is to contribute to empirical literature by providing empirical evidence and by clarifying whether classical macroeconomic trade-offs, such as those implied by Okun's Law and the Phillips Curve hold in small transition economies such as the Western Balkan countries.
The analysis employs annual panel dataset covering six Western Balkan economies (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia), over the period 2000–2023. The empirical approach combines correlation analysis, country-specific ordinary least squares OLS regressions, and panel fixed-effects (FE) estimations. Okun’s law is tested through the growth–unemployment relationship, while a reduced form Phillips curve framework is employed to examine the inflation–unemployment trade-off. The findings indicate no strong or systematic evidence that higher GDP growth consistently reduces unemployment across the WB-6, suggesting a weak or absent Okun-type relationship. Inflation and GDP growth are found to co-move positively, supporting the hypothesis of a short-run growth–inflation linkage. And the evidence for a Phillips-type trade-off is mixed, with inflation reducing unemployment only in certain countries or periods, reflecting heterogeneous labor market structures and institutional conditions. The results suggest that in Western Balkan economies, inflation and growth tend to move together in the short run, but economic growth alone does not reliably translate into lower unemployment. The inflation–unemployment relationship appears state-dependent and sensitive to structural and institutional factors especially during crisis.
Policy efforts should focus on growth-enhancing structural reforms, particularly in labor markets, education and productivity, rather than relying on demand-side growth or inflationary pressures for reducing unemployment.
The analysis is based on harmonized secondary data from international recognized sources, including the World Bank, IMF, Eurostat, ensuring comparability and reliability across countries and over time and providing policy-relevant and transparent elasticity estimates for the WB-6 region.