The effect of unemployment rate on gross domestic product

Abstract

Unemployment is a macroeconomic indicator that reflects the inability of the economy to make full use of labour resources. The lack of adequate conversion of the labour force leads to the increased number of unemployed and thus unemployment. The number of unemployed is rising in Uganda and this comes with various effects. This study sought to investigate the effect of unemployment rate on gross domestic product in Uganda for the period 1985-2019 using annual time series data. The Auto Regressive Distribution Lag (ARDL) bounds test approach is applied to determine the existence of the long run linkage among the variables. The results from the ARDL model suggest that there is a long run relationship between unemployment, inflation, population growth, gross capital formation and gross domestic product as per the bounds test. The empirical results obtained confirmed that there is a negative relationship between unemployment and gross domestic product in the long run. In order to reduce the effect of unemployment on gross domestic product, the government should carry out policies such as increased government spending, ensuring proper education system and flexible labour market policies or legislations that entice many private sector and small businesses to consolidate the existing entrepreneurship activity.