The labor market impact of inflation uncertainty: Evidence from Sub-Saharan Africa

Abstract

Over the past decades, monetary policy has been receiving increasing attention in the explanation of the raising share of unemployment in developing countries, especially in the context of the debate on inflation targeting. This study contributes to the current debate by revisiting the effect of inflation (IF) and its uncertainty (IFU) on employment in an inflation-driven labor demand framework applied to 26 Sub-Saharan African countries over the period 1996–2017. The combination of threshold and quantile regression methods points to an asymmetrical effect of IF and IFU on employment across different labor demand spectrums. The respective threshold levels of IF and IFU are approximately 6.07% and 0.75%. While inflation negatively influences employment beyond the estimated threshold, a reverse effect is observed for inflation uncertainty. Overall, the negative net effect of IF and IFU on employment exceeds the corresponding net employment gains, especially among non-inflation targeting countries with lower levels of employment. One fundamental implication is that policy makers should adopt explicit inflation- and uncertainty-targeting policy framework in order to sustain labor market outcomes.