Nexuses Between Unemployment, Inflation And Economic Growth In Ethiopia: An Application Of Autoregressive Distributed Lag (Ardl) Approach

Abstract

The objective of this study is to analyze the links unemployment, inflation and economic growth in Ethiopia by using time series data from 1991 to 2021. The data used in this analysis were secondary data collected from National Bank of Ethiopia and World Bank. The lag selection criteria pointed out that the lag two is appropriate lag for analysis. With the help of co-integration and error correction models, unemployment has short run and long run negative impact on economic growth. The ARDL estimation model reveals that GDP per capita, and inflation rate variables negatively & significantly affects unemployment rate and highly significant at 1%. The signs of GDP per capita and inflation rate are in line with conventional economic theory. The bound test co-integration shows the existence of long run relationship between dependent and independent variables. In the short run, real gross domestic product (GDP) per capita, and inflation rate (INF) are negatively affect unemployment by the value of 0.5%, and 1.49% respectively and they are statistically significant at 1% level. In addition, the coefficient of error correction term equilibrates the short run dynamics to long run dynamics by the speed of 17%. In the long run, economic growth (GDPP) has negative impact on unemployment of the country. A one dollar increase in real GDP per capita income on average leads to 0.68% unemployment rate reduction ceteris paribus. In the long run Inflation rate has positive impact on unemployment rate in Ethiopia. As the inflation rate increases by one percent, unemployment rate decreases by 1.67 % on average all else being equal.. The CUSUM and CUSUM square are show that the model is structurally stable within the 5% of critical bounds. inflation does not Granger unemployment rate in Ethiopian economy from 1991-2021 at one period lag and unemployment rate does granger inflation rate. GDP Per capita granger causes unemployment and unemployment granger causes GDP Per capita also. Inflation rate does granger causes GDP Per capita and GDP Per capita does not granger causes inflation rate in Ethiopia. In order to reduce unemployment problem, the government should increase economic growth via job creation which may reduce unemployment