Macroeconomic determinants of unemployment rate in Uganda

Abstract

This study estimated the macroeconomic determinant of unemployment in Uganda during the period 1983 to 2016. The study estimated unemployment rate against key macroeconomic variables that affect unemployment like: Inflation, population, economic growth rate and exchange rate. The study used the 2 step Engle- Granger method given the small data sample. All the diagnostic tests showed that the study is free from multicollinearity, serial correlation, with variables used being normally distributed. The error correction term is negative and statistically significant. The key results also revealed that unemployment is negatively related to economic growth confirming Okun’s law for Uganda. This means that a gain in economic growth will reduce unemployment. Additionally, there is a positive relationship between education level, population growth rate and unemployment while inflation has a negative relationship; this supports the Phillip’s Curve assertion that there is a negative relationship between unemployment and inflation. Therefore, to curb unemployment in Uganda, Government should adopt policies that promote economic growth and reduce inflation such as; the use of contractionary monetary policy to contain inflation by reducing money supply within the economy through decreased bond prices and increased interest rates; and using the wage and price controls given that Uganda’s inflation is basically due to consistent increase in price may work as it may reduce unemployment that results from high cost of production. Lastly, government can adopt fiscal policies like increasing taxes such as the income tax and VAT as well as cutting government spending a move that will reduce aggregate demand.