Macro-economic factors affecting the unemployment and its effect on the Sri Lankan GDP

Abstract

Underutilization of human capital which is also known as Unemployment is a critical factor that is essential to the growth of economies. Unemployment of youth in the country is a severe and sensitive problem in Sri Lanka throughout the last few decades. As a result, Sri Lanka is facing various issues including youth unrest due to the unemployment and poverty. A proper analysis of the reasons for unemployment within the country would lead to better decision making at the higher levels. Various advanced time series techniques can be used to identify the factors which affect unemployment. In this study, the focus was to improve the decision-making process of the government while focusing on the components which influence the unemployment rate within the country. The data related to unemployment, inflation, GDP Growth, Population Growth and Exchange rate were extracted for the analysis. The study was done using Advanced Time series analysis. In the advanced time series analysis, Cointegration analysis, ARDL Bound Cointegration testing, Error Correction Modelling and VAR Modeling were used. Long term relationship between unemployment and the cluster of macroeconomic factors: inflation, GDP Growth, Population Growth and Exchange rate was identified by the ARDL Bound Cointegration analysis. Based on the residual analysis carried out, the fitted ARDL (1,0,1,0,1) model was determined as the best fitted model for the selected data. Finally, the long run association between Unemployment and GDP Growth was identified via the Johanson Cointegration Analysis and a VAR Model was fitted since there was no long run relationship between Unemployment and GDP Growth.