Examining the Effects of Unemployment on Economic Growth in Sri Lanka (1991-2017)

S A U Niranjala

doi:10.7176/jesd/10-20-04

Abstract

Economic growth of a country can be considered as a major requirement to reduce unemployment. This paper has investigated the relationship between growth and unemployment for the period of 1991-2017 in Sri Lanka through the implementation of Okun’s law, using ARDL Bound test approach. The empirical results confirmed existence of Okun’s Law which is negative relationship between unemployment and economic growth in Sri Lanka. Thus, it can be concluded that the lack of economic growth explain the unemployment problem in Sri Lanka Keywords: ARDL Bound test, GDP, Okun’s Law, Unemployment DOI : 10.7176/JESD/10-20-04 Publication date :October 31 st 2019

Highlights

Low unemployment rate and increase of GDP have become the most challenges that threaten the economies of most developed and developing countries
The results showed that the unemployment affected positively by economic growth, in other words 1% rise in GDP will fall the unemployment rate by 0.08%
Economic growth of a country can be considered as a major source to reduce unemployment

Summary

Introduction

Low unemployment rate and increase of GDP have become the most challenges that threaten the economies of most developed and developing countries. High rates of unemployment which signifies a deficiency in the labour market, a negative influence on individuals, families and the entire economy. There is a widely accepted view in economics that the growth rate of the GDP of an economy leads to increases employment and reduces unemployment. The negative correlation between in unemployment rate and changes in output growth is viewed as one of the most consistent relationship in macroeconomics. This theoretical proposition relating output and unemployment is called “Okun’s Law”. In examining unemployment and economic growth nexus around the world, some studies have proved the existent of inverse relationship between economic growth and unemployment (Soylu,2018; Abu, 2016; Abdulkhaliq,2014; Hussain et al, 2010); while some showing a positive relationship (Kreishan ,2017; Sahin et al, 2013)

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