Towards sustainability: Does energy efficiency reduce unemployment in African societies?

Abstract

• This study synthesizes endogenous growth model with Okun's Law on unemployment. • Examines the nexus between energy efficiency improvements and unemployment. • Energy efficiency improvements help reduce unemployment. • Countries with better human capital experience greater reduction in unemployment. • Education complements the unemployment-reducing effects of energy efficiency. The Sustainable Development Goal 7 seeks universal access to energy, substantial increase in the share of renewable energy and doubling of energy efficiency efforts. The success of these targets most likely depends on maximizing, where they exist, positive synergies or trade-offs with other development outcomes. Studies investigating the relationship between energy efficiency and (un)employment remain inconclusive and mainly focus their analysis on the energy-supply side, neglecting the demand side. Moreover, these empirical studies lack a sound theoretical framework that links unemployment to energy efficiency. Synthesizing the neoclassical endogenous growth model with Okun's Law, this study adopts a demand-side approach to examine the nexus between unemployment and energy efficiency, conditioning for heterogeneities in education. We apply the stochastic frontier approach and the generalized method of moments to an unbalanced panel dataset for 51 African countries, spanning 1991–2017. We conduct several robustness checks to assess the stability of the estimated relationship. The results confirm our theoretical prediction that, directly, energy efficiency reduces unemployment. However, further empirics show that economies with better human capital experience greater reduction in unemployment than those with less-developed human capital. This implies that investing in education is a key complementary factor to enhance the unemployment-reducing effects of energy efficiency.