Unemployment and Economic Growth: An Empirical Analysis for Ethiopia (1974/75-2013/14)

Abstract

This study attempts to explore the nexus between unemployment and economic growth by mainly focusing on the impact of unemployment on economic growth of Ethiopia over the period 1974/75 – 2013/4. The study also examines the long run as well as short run empirical relationship among the macro variables viz., real Gross Domestic Product, unemployment, investment, employment per total population, and the percentage change of total population. All the data are from ‘World Development Indicators’ published by the World Bank from 1974/75 to2013/14, the National Bank of Ethiopia (NBE), and Pen World data base. By utilizing Johansen’s co-integration analysis and error-correction methodology, this paper examined the long-run relationship and short run dynamics between Gross Domestic Product, unemployment, investment, employment per total population, and the percentage change of total population. The present study shows that a 1% increase in unemployment lead to about 0.82 % reduction in real GDP of the country. The test results further indicate that unemployment has a significant negative impact, especially in the short run, on the country’s economic growth. Similarly, the negative result of employment to the population ratio may further signify that the rapidly growing economy for almost a decade does not result in equivalent employment opportunity. Although population and investment show a positive sign, these rapidly growing population and slowly growing vibrant investment sector that absorbs the rapidly growing productive population as well as the weak employment generation capacity of the economy compared to the labor force growth, in the long ran, the result indicates, that as time passes on with this trend, negatively affects the country’s economic growth. To reduce the negative impact of unemployment, and expand the employment generating mechanisms like by strengthening investment in both agricultural and non-agricultural sectors that absorb more labor force; the study recommends adoption of more employment generation mechanisms, addressing the labor market’s failure & improving the labor force productivity, improving agricultural productivity & increasing its linkage with other sectors.