The impact of oil prices, foreign direct investment and trade openness on unemployment rates in an oil-exporting country: The case of Saudi Arabia

Abstract

This study analyzes the effects of major macroeconomic variables (oil price, foreign direct investment inflows, real gross domestic product and trade openness) on the unemployment rate in Saudi Arabia. The study adopted the ARDL model and bounds testing for co-integration approach and other diagnostic econometric techniques to check potential issues resulting from the use of time series data, from 1991 to 2019. Findings show that changes in the four variables exhibit a significant negative long-run effect on the unemployment rate. Additionally, we detected a non-linear relationship between unemployment and oil prices. The oil price effect is positive only if it exceeds $41.2 per barrel. A per-barrel price of oil below this threshold appears to worsen the labor market situation in Saudi Arabia. Revenues from oil exports account for major source of income for the country; unfortunately, oil prices are subject to factors beyond the control of the country (inconsistencies in global oil prices). The country needs to diversify its economy especially in growth-enhancing sectors of the economy to generate employment and moderate unemployment.