Unemployment decks growth.

This study uses data from three decades on three leading indicators to examine the relationship between Ethiopia’s unemployment, GDP, and inflation. The correlation parameters a and b between unemployment and inflation are highly significant (Table 4), implying that the correlation is dynamic (changing over time) (Meloni et al. 2022). Furthermore, as shown in Figure 1, inflation and unemployment have an inverse relationship. This is because more sectors hesitate to act thoroughly on incorporating inflation expectations into nominal wage demands when they experience unemployment (Palley 2012). Simona et al. (2019) also argued that the inflation rate hurts foreign direct investment (FDI), increasing unemployment because FDI flows are widely believed to create new jobs and thus reduce unemployment.

In the unemployment-GDP pair, the correlation parameters a and b (see Table 4) are highly significant, indicating that the correlation is dynamic. Additionally, for every 1% increase in unemployment, GDP growth decreased by roughly 6% in the fitted ARDL (3,3,3) model, controlling for changes in inflation and its lags, the first, second, and third lags of GDP. This is unsurprising given the effects of GDP growth on unemployment (both short- and long-term) (Meloni et al. 2022). Several empirical studies have investigated the relationship between unemployment and GDP. For example, Okun (1962) studied the relationship between unemployment and GDP using the US dataset after the Second World War and found a negative relationship between the two indicators. Most recently, Bein and Ciftcioglu (2017) investigated the relationship between the relative share of agriculture in GDP and the unemployment rate for selected European countries and found that the unemployment rate is negatively related to the relative GDP share of agriculture.