Effects Of Labor Force Participation On Economic Growth In Ethiopia: Time Series Analysis

Abstract

The labor force participation rate is the fraction of the working age population (15 -64 years old) who are currently employed and people who are unemployed but actively seeking job. It is the most abundant factor of production of any nation and it determines the development of one country. The empirical studies conducted on the labour force participation and economic growths in Ethiopia by different researchers have many deficiencies. Some studies focus on female labour participation rate alone, while other studies missed most important control variables like wage, literacy rate, unemployment rate and total fertility rate. In the situation where omission of relevant variables and general idea (total labor force participation rate) are existed it is important do another new investigation. Thus, the primary aim of this study was to investigate the effect of total labor force participation on Ethiopian economic growth during the period of 1992 to 2022 using time series data. To meet this goal, the study used a quantitative research approach. The secondary data for this study were collected from National Bank of Ethiopia, Ethiopian national labor statistics and International labor organization (ILO). The study used descriptive statistics to clarify trends of study variables in Ethiopia during the study period. The study also employed econometric analysis of the ARDL bound test approach to examine the long and short run effects of selected explanatory variables on economic growth. The results of Augmented Dickey Fuller for unit root test reveal that all variables are stationary after the first difference. All the results of post estimation tests indicate that the data are statistical good fit with ARDL model. The result of bound tests for cointegration states that there exists a long-run equilibrium relationship between labor force participation rate and economic growth and other explanatory variables. The empirical results of long run designated that the total fertility rate and unemployment rate were found negative and significant effect on economic growth while gross fixed capital formation and total labor force participation rate were found positive and significant effect on economic growth in Ethiopia. The results of short run stated that the total labor force participation rate was found negative and significant effect on economic growth while the literacy rate and, wage and salaried workers have positive significant effect. The results of granger causality test reveal that total labor force participation rate has bidirectional causal relationships with real GDP but it has unidirectional causal relationships with gross fixed capital formation. As indicated in results, unemployment has a negative significant effect on economic growth. Hence, the study recommended that policy makers should put a great deal of energy in order to device policies that will bring about increase in the proportion of the adult population seeking for jobs; particularly, the young and talented graduates that are produced yearly in the country by formulating policy that enhance industrialization to improve labor force productivity. Literacy rate has positive impact on economic growth in Ethiopia. The educated people are influencing more the economic output than the non-educated ones because capital accumulation or even the rise in the technological advancement can be the fruits of educated person. Thus, the study recommended that the government of Ethiopia needs to give more importance in technical education format that will produce more skilled labor