Analysis of the relationship between economic growth and

unemployment
CHAPTER ONE
Introduction
Growth is a matter of extreme importance for countries in the developed
and developing world. Growth is considered to be a pathway to decrease
the level of unemployment Sustained growth with employment
generating polices eventually trims down the critical problems of
unemployment. Growth is an essential component for the progress and
prosperity of mankind. Growth helps in upgrading the living standards of
people. In classical and neoclassical economics, unemployment is due to
rigidities imposed on the labour market from the outside, such as wage
laws, taxes, and other regulations that may be the reason of hiring of
minimum workers.
Keynesian economics explains unemployment as a result of to
insufficient effective demand for goods and services in the economy.
Unemployment is a social and political issue. It is a phenomenon issue
where resources are wasted leading to a deacceleration in growth.
AI
he study aim to investigate the casual relationship between
unemployment and economic growth.
O!"ECTI#E$
!etermining the relationship between unemployment and economic
growth.
o provide an insight into the development of alternatives to improve
the economic growth.
Problem statement
"fter almost more than two and half decades of political independence,
#imbabwe$s economic growth leads to a lot to be desired. his is borne
out by indicators such as high levels of inflation, higher levels of
unemployment being caused by various factors such as low wages.
"ccording to %orld &ank Statistics '())*+, #imbabwe$s real per capita
income fell to levels below ,-. between ())/ and ())*.
Unemployment levels continue to be woefully high and income
disparities are still glaringly large. Inflation rate continues on its upwards
spiraled up to levels above */)). '0entral Statistical 1ffice2 1ctober
())-+ leaving the employed failing 3ust to maintain the minimum
consumption basket.
1nly negligible industriali4ation has occurred since 567). It seems
economic growth has since independence failed to keep pace with
population growth. 8ost9independence development efforts such as the
:conomic Structural "d3ustment 8rogram ':S"8; 5665+ amoung other
things lead to the removal of price and wage control 'sichone,())<25+.
his lead to a huge increase in unemployment. "lso in an attempt to spur
growth of the economy the plans were to redistribute wealth both public
and private, from the minority of whites controlling the economy to
ma3ority of blacks that made up the economy. =owever these policies had
serious implications on several white settlers who started to walk out of
#imbabwe and their enterprises collapsed. his also led to the increase in
unemployment. >rom these policies we can deduce that policy makers
were not mainly focusing on unemployment as a factor that has an effect
on economic growth. herefore the rate at which the economy is
growing in relation to the rate of unemployment is the motive behind this
research. 1f significance in this research is to see whether
unemployment has a negative or a positive contribution on the worsening
of the growth of the economy in the period 567/ to ())/.
$ignificance of the study
his research provides an empirical investigation of the relationship
between unemployment and economic growth in #imbabwe. he
research provides a base for the policy makers to develop alternatives to
improve the growth of the economy.
CHAPTER T%O
&ITERAT'RE RE#IE%
:conomic growth is the increase of per capita gross domestic product or
other measures of aggregate income. :conomic growth is primarily
driven by improvements in productivity which involves producing more
goods and services with the same inputs of labor, capital energy and
materials. here has been extensive literature on the issue of growth and
unemployment.
&lanchard elaborated in conventional theories of growth and
unemployment that neither unemployment influence growth nor that long
run growth effects e?uilibrium unemployment. @omer also found out
that growth brought about unemployment due to increase in technology.
=e stated that economic growth bring about unemployment through skills
obsolescence and new machinery.
Kur4 and Salavdori exposited that classical economists focussed on the
long period growth and paid a little attention to shot period. Aeoclassical
economists also started with the same style but soon realised the
problems and focussed on intertemporary analysis. Aeoclassical
economists focused in investment in physical and human capital which
will then lead to a decrease in the rate of unemployment. Influential work
is done by =errod and !omar about growth and unemployment.
echnological innovation had dual effects on the economy. echnological
innovation can lead to high economic growth. "lso it can lead to high
unemployment rate. wo different types of effects were elaborated by
economists. 8issarides 8ostel Binay found that technological progress
helped to reduce unemployment due to capitali4ation effect. @apid
growth raised the returns of firms and new firms were launched to share
the profit and in turn more 3obs were created. Cuick innovation made the
labourers unemployed. Growth and technological progress had
significant role in minimi4ing unemployment but this growth remain
limited to a few areas and regional disparities emerged.
Inflation is the rise in the general level of prices of goods and services in
an economy over a period of time. :conomists generally agree that
higher rates of inflation and hyper inflation are caused by an excessive
growth in the money supply. Keynesian view inflation as constructive to
a faster rate of economic growth since the excess demand and favorable
market conditions will simulate investment and expansion.
CHAPTER THREE
ETHO(O&O)*
<.) Introduction
his section proceeds to an econometric investigation. It endeavors to
outline, specify and develop the empirical model. he strategy is to
consider regressions of :conomic Growth on a set of economic variables
that affects the growth rate of the economy. he set of variables are
unemployment and inflation. his chapter explains and 3ustifies variables
to be used. It also reveals the data collecting techni?ues used in this
study.
+,- odel $pecification
o discover whether and how economic growth can be explained by
economic variables, the model in this study is based on the following
e?uation.
Economic growth =B
0
+ B
1
unempl + B
2
inflatoin + U
i

%here
:conomic growth D gross domestic product at constant price in
percentages.
Unempl D unnual unemployment rate as a percentage.
InflationDannual inflation rate
U D :rror erm
& D regression coefficients
herefore, the model with which the econometric phenomenon will
be empirically tested can be stated as follows
G D f '8, U,+ %here
G D "nnual :conomic growth
8 D "nnual inflation rate
U D "nnual unemployment rate
o come up with a mathematical e?uation explaining the behaviour of
economic growth as any of the above determinants change, the method of
1rdinary Eeast S?uares '1ES+ will be used. %ith this method, the
mathematical e?uation can be stated as
) . /
0
1 /
-
P 1 /
2
' 1 3
%here 3 is the error term, which captures all other variables not included
in the model.
.+,2 "ustification of #ariables
+,2,- (ependent #ariable
Economic )rowth
It measures the rate of increase in an economy$s real output overtime. "n
increases in unemployment rate lead to a decrease in economic growth..
"s such, economic growth is used in this model as an explanatory
variable.
+,2,2 Independent 4ariables
'nemployment
It means failure to secure a 3ob resulting in deprivation of income. he
spillover effects of unemployment are low productivity and low living
standards of people which may lead to decrease in economic growth.
Unemployment affects the demand side of the economy. If people have
no money to spend, local businesses may find it difficult to sell their
products and this spiraling effect can affect the growth of the economy.
Inflation
It is the sustained rise in the general level of prices overtime. =igh rates
of inflation reduce the growth rate of the economy. Inflation thus
increases the cost of buying machinery by companies resulting in low
productivity. Inflation also result in retrenchment which result in low
labour force. Eow labor force results in low productivity. Inflation also
affects the business fraternity since it makes planning and budgeting very
difficult resulting in business closures, low output, and commodity
shortage.
.+,+ (ata Characteristics
+,+,- (ata Choice
his research relied heavily on secondary data sources. his is because
secondary data has the following advantages2
Secondary data is less expensive to get as compared to primary data,
which re?uires huge financial resources in survey taking.
he data is based on nationally representative samples taken by
responsible organi4ations
=owever, secondary data has the limitation that it may loose some
important information during its processing.
(ata $ources
9G!8 data at constant price is obtained from the national accounts section
9annual employment rate is obtained from the employment and education
sector.
9annual inflation rate is obtained from the prices section.
Tabular and )raphical presentation.
90onstructed tables to display data on the annual rate of unemployment,
annual inflation rates and the annual economic growth in percentages.
9line graphs represent the economic growth trend for the period 567*9
())/
wo9way "A1B"
9tables for hypothesis testing
9calculation of the >9value
Hypothesis
=
)
,here is a positive relationship between economic growth and
unemployment
=
5
,there is an inverse relationship between economic growth and
unemployment
YEAR P
(annual
inflation
rate in
%)
U (annual
unemployment
rate in %)
G
(economic
Growth in
%)
1986 1!" 6!# "!1
198$ 11!9 $!8 1!1
1988 $!1 11 $!6
1989 11!6 1"!8 %!"
199& 1%!% 1#! $
1991 "#!# 1"!% $!1
199" "!&9 1% '8!
199# "$!6 16!" "!1
199 ""!# 1$ %!8
199% ""!6 18!6 &!"
1996 "1! 19!% 9!$
199$ 18!9 "&!" 1!
1998 #1!$ "&!1 &!8
1999 %8!% "1!" '!1
"&&& %%!8 ""
56,2
"&&1 $1!9 ""!
50,2
"&&" 1##!" ""!"
57,8
"&&# #6% "#!1
59,:
"&& #%& "#!
5+,;
"&&% "#$!8 "#!8
5:
CHAPTER <O'R
PRE$ENTATION AN( INTERPRETATION O< RE$'&T$
:,0 Introduction
It would be unrealistic to say that unemployment and inflation are related
to economic growth without carrying out proper empirical tests. his
chapter therefore provides the presentation and interpretation of results
obtained from the regression of time series data of economic growth,
unemployment and inflation. It highlights findings on the relationship
between economic growth, unemployment and inflation. "ppropriate
tests will be carried out to ensure that the model satisfies all 1rdinary
Eeast S?uares '1ES+ assumptions as well as to establish stationarity of
variables.
(o)el *ummary
Mod
el R
R
Squar
e
Adjuste
d R
Square
Std.
Error of
the
Estimate
1
.609(a) .371 .297 .69003
a !redi"tors# ($o%sta%t)& Unemployment, Inflation
A+,-A .A/0E
Model
Sum of
Square
s 'f
Mea%
Square ( Si).
1 Re)re
ssio%
220.0
7
2 110.203 *.010 .019(a)
Resid
ual
373.93
9
17 21.996
+otal *9.3
6
19
a !redi"tors# ($o%sta%t)& ,%em-lo.me%t& i%flatio%
/ 'e-e%de%t 0aria/le# e"o%omi" )ro1th
1oefficient2(a)
Model
,%sta%dardi2
ed
$oeffi"ie%ts
Sta%dardi
2ed
$oeffi"ie%
ts t Si).
3
Std.
Error 3eta
1 ($o%sta
%t)
7.* .0 1.41 .043
i%flatio% 5.019 .012 5.377 51.*64 .13*
,%em-l
o.me%t
5.319 .2*2 5.303 51.263 .22
a 'e-e%de%t 0aria/le# 0AR00003
herefore using the results in the table above , the model will be
economic growth . 9,::750,-8P50,+-8'13.
he e?uation shows that unemployment is negatively related to economic
growth. his means that a decrease in unemployment also increases the level
of economic growth.
>rom the e?uation also, a unit increase in unemployment leads to a
decrease in economic growth. "lso from the table, inflation is negatively
related to economic growth. his means that a unit decrease in inflation
increases economic growth but not as much as unemployment.
The DW Test
he !urbin %atson '!%+ test is used to test for autocorrelation.
Balues of the test ranges from ) to F where values close to )
indicate strong positive correlation and those close to F indicate
strong negative correlation. Balues close to ( indicate no serial
correlation. "s a rule of thumb d should be between 5./ and (./ to
indicate independence of error terms. he !% statistic of 5.6*6
thus lies in the 4one of no autocorrelation satisfying the ordinary
least s?uares '1ES+ assumption that successive values of the
random error term should be independent. he !urbin %atson
statistic is also greater than @
(
hence ruling out the possibility of
spurious regression.
:,+ Interpretation of Results
o test the goodness of fit of the overall model, we consider the >9
statistic and @
(
. he computed >9statistic of /.)5) exceeds the critical >9
value of ).)56 at /. level of significance. "s a rule of thumb the >9
statistic should be greater than /.%e can therefore conclude that the
model is statistically significant.
he coefficient of determination '@
(
+ shows the proportion of total
variation explained by changes in any of the independent variables
included in the model. he @
(
value of ).<-5 shows that <-.5. of the
variation in economic growth is explained by the levels of inflation and
unemployment. he remaining *(.6. is explained by other factors not
included in the model, which may be captured by the error term.
he significance of each explanatory variable is measured by the t9
statistic values. :ach explanatory variable is said to be significant if the
absolute value of the t9statistic greater than ( or approximately e?ual to (.
>rom the results obtained, all absolute t ,statistic values are greater than
( showing that all the explanatory variables included are significant in
explaining economic growth.

1orrelation2
i%flatio%
u%em-lo
.me%t
E"o%omi"
)ro1th
i%flatio% !earso%
$orrelatio%
1 .*99(66) 5.**4(6)
Si). (25
tailed)
. .00* .010
7 20 20 20
u%em-lo.
me%t
!earso%
$orrelatio%
.*99(66) 1 5.*29(6)
Si). (25
tailed)
.00* . .016
7 20 20 20
E"o%omi"
)ro1th
!earso%
$orrelatio%
5.**4(6) 5.*29(6) 1
Si). (25
tailed)
.010 .016 .
7 20 20 20
66 $orrelatio% is si)%ifi"a%t at the 0.01 le8el (25tailed).
6 $orrelatio% is si)%ifi"a%t at the 0.0* le8el (25tailed).
CHAPTER <I#E
CONC&'$ION$
CHAPTER $E#EN