Macroeconomic Determinants Of Unemployment Evidence From Ethiopia: Time Series Analysis

Abstract

Ethiopia is a poor agrarian country with high unemployment which is one of the socio-economic problems of the country. For this case the study would be examines macroeconomic determinants of unemployment evidence from Ethiopia: a time series from 1991 to 2022 by using secondary sources. The specific objectives of the study were to show the trends of unemployment rate, to examine the short-run and long-run effect of macroeconomic variables on unemployment in Ethiopia and to identify the causality between macroeconomic determinants and unemployment. The study employ Auto-Regressive Distributed Lag(ARDL)bound testing approach .Augmented Dickey Fuller and Phillips-Peron Tests were used for unit root test that all variables are stationary after fist difference. F-statistic (5.028) is greater than the upper bound value of F-statistic at 10% (3.23), at 5% (3.61), at 2.5% (3.99), and at 1% (4.43) level of significance which tells us that there is the long-run relationship between variables. The study result indicates that real GDP, inflation rate and FDI net inflows are negatively and significantly affect unemployment both in long run and short run. Population growth is positively and significantly affecting unemployment at 5% significance level both in short run and long run. In the long run employment to population ratio is negatively and significantly affect unemployment rate. The speed of adjustment from previous year’s disequilibrium in unemployment rate to current year’s equilibrium is about 42.4 percent in one period. Government should work on expansion of fiscal policy and monetary policy to reduce unemployment. This can be done through spending government expenditure or through decreasing tax which shifts the AD to the right then increases the real GDP which negatively affects unemployment according to the result obtain from this study. When GDP of a given country increases it brings growth which causes the expansion of the existing sectors and newly emerging sectors in the country. These newly emerged and expanded sectors demand new and experienced human power which reduces unemployment rate