THE IMPACT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT

Transcription

1 The Impac of Inflaion and Economic Growh on Unemploymen 1 THE IMPACT OF INFLATION AND ECONOMIC GROWTH ON UNEMPLOYMENT The Impac of Inflaion and Economic Growh on Unemploymen: Time Series Evidence from Pakisan Ayesha Wajid Universiy of Managemen and Technology Dr. Rukhsana Kalim Universiy of Managemen and Technology This paper has been presened in he organized by School of Business and Economics Universiy of Managemen and Technology, Lahore, Pakisan This paper has been included in he conference proceedings wih good inenions, where he conference and is organizers are no liable a all for he conens of his paper and / or any par of i. For more informaion abou he conference please visi he conference websie: hp://cgr.um.edu.pk/icobm2013/index.hml or wrie he organizers a icobm@um.edu.pk

2 The Impac of Inflaion and Economic Growh on Unemploymen 2 ABSTRACT This sudy is conduced o explore he impac of inflaion and economic growh along wih rade openness and urban populaion on unemploymen for a case of Pakisan for he period from This sudy uses Augmened Dickey Fuller (1981) Tes o es uni roo problem and in order o find ou he long run relaionship among unemploymen; inflaion, economic growh, rade openness and urban populaion as share of oal populaion, we have applied Johansen Juselius (1990) Maximum Likelihood Approach. This sudy concludes ha inflaion significanly increases unemploymen in he long erm; economic growh has a significan adverse impac on unemploymen in he long run and in he shor run respecively, and he impac of rade openness on unemploymen is posiively and insignifican in he long run bu his impac becomes significan in he shor run. Finally, he findings of he sudy sheds ligh on he impac of urban populaion as share of oal populaion on unemploymen for boh long run and shor run, and i has found ha urban populaion as share of oal populaion has an adverse impac on unemploymen in he long run as well as in he shor run. Keywords: Pakisan; Unemploymen, Inflaion, Trade Openness, Real GDP Per Capia, and Urban Populaion as share of Toal Populaion

3 The Impac of Inflaion and Economic Growh on Unemploymen 3 1. INTRODUCTION Unemploymen is has grea imporance among he macroeconomic problems. If any counry experiences unemploymen, i will no only pu negaive impac on he economic indicaors of ha counry bu, i will also hur he social norms of such counry. In case of Pakisan; he unemploymen was 3.14 percen in he year 1973; i increased o 3.7 percen in he year 1980, hen i sared declining and became 2.55 percen in he year Afer he year 1989; he unemploymen sared increasing and i reached o is highes level 8.64 percen in he year Aferwards, he unemploymen rae reaches o 5.34 percen in he year The rends of unemploymen may be viewed from he figure no. 1 for a case of Pakisan. FIGURE NO UNEMPLOYMENT AS SHARE OF TOTAL LABOR FORCE

4 The Impac of Inflaion and Economic Growh on Unemploymen 4 Besides unemploymen; inflaion is anoher macroeconomic problem which hurs boh economic and social indicaors in any counry. Pakisan economy has also come across wih his macroeconomic problem. The inflaion rae was percen in he year 1973; i increased o percen in he year 1974, hen i sared decreasing and became percen in he year 1980, and aferwards i reached o 7.84 percen in he year Afer he year 1989; he inflaion rae urned o be 2.91 percen in he year 2003 and i became percen in he year The inflaion rae changed each year and followed boh upward and downward rend. I could be seen from he figure no. 2 for a case of Pakisan. FIGURE NO CONSUMER PRICE INDEX AS PROXY FOR INFLATION Real Per Capia GDP is used as proxy for economic growh in his sudy. I is generally perceived ha when economic growh akes place in he counry; i increases he pace of economic

5 The Impac of Inflaion and Economic Growh on Unemploymen 5 aciviy in he counry, due o which, employmen increases. The increase in employmen will enhance he purchasing power of he people in he counry and as resul o i, consumpion increases which leads o raise aggregae demand and hence inflaion in he counry. The real per capia GDP was Rs in he year 1973; i urned o be Rs in he year 1980, i furher wen up o Rs in he year 1990, aferwards he upward rend coninues o Rs in he year 2000 and finally i reaches o Rs in he year The rend of economic growh is presened in he following diagram: FIGURE NO REAL PER CAPITA GDP The associaion beween inflaion and unemploymen is a relaionship which has go a grea fame in he lieraure. The sudies like Rogerson s (1988); Cooley and Hansen (1989), Morensen and Pissarides (1994), Shi (1997), Pissarides (1999), Berensen, Lagos and Wrigh (2005), Lehmann (2006), Beyer and Farmer (2007), Kumar (2008), Berensen, Menzio and

6 The Impac of Inflaion and Economic Growh on Unemploymen 6 Wrigh (2008), and Menzio and Wrigh (2008) have found a posiive relaionship beween inflaion and unemploymen in he long run. On he oher hand; Karanassou, Sala and Snower (2003), Franz (2005), and Schreiber and Wolers (2007) had found an inverse relaionship beween inflaion and unemploymen in he long run. Afer he relaionship beween inflaion and unemploymen; anoher relaionship has go grea name in he sudies of macroeconomics and ha is he relaionship beween economic growh and unemploymen. The sudies like Vandemoorele (1991); Oladeji (1994), Umo (1996), Rama (1998), Silvapulle e al (2004) and Sephen (2012) have found an inverse relaionship beween economic growh and unemploymen for he differen counries for differen periods respecively. Based on his argumen; his sudy is aimed a finding empirically he impac of inflaion; rade openness, economic growh and urban populaion as share of oal populaion on unemploymen in case of Pakisan for he period ranges from OBJECTIVES OF THE STUDY This sudy comprises of he following objecives: 1. To explore he impac of inflaion; rade openness, economic growh and urban populaion on unemploymen in he long run. 2. To explore he impac of inflaion; rade openness, economic growh and urban populaion on unemploymen in he shor run HYPOTHESIS OF THE STUDY Null Hypohesis: 1. Inflaion; rade openness, economic growh and urban populaion do no impac significanly unemploymen in he long run.

7 The Impac of Inflaion and Economic Growh on Unemploymen 7 2. Inflaion; rade openness, economic growh and urban populaion do no impac significanly unemploymen in he shor run ORGANIZATION OF THE STUDY In he firs par of his sudy; inroducion is presened, in he second par of he sudy, some of he empirical sudies are presened which have already esed our desired objecives, in he hird par of he sudy, an aemp is made o menion daa source and mehodology of he model, in he fourh par, resuls and heir discussion is presened and in he las par, he conclusion of he sudy is shown. 2. LITERATURE REVIEW The lieraure reveals many sudies on he relaionship among unemploymen; inflaion, economic growh, rade openness, real GDP per capia, and Urban Populaion as share of oal populaion for differen counries for differen ime periods. This par is designed o review he pas sudies which demonsrae he relaionship among unemploymen; inflaion, economic growh, rade openness, real GDP per capia, and Urban Populaion as share of oal populaion. I is given as below: Sephen (2012) invesigaes he impac of unemploymen on economic growh for a case of Nigeria for he period from He used Cobb Douglas producion funcion o develop his model and esimaes his resuls by using simple OLS mehod. He has found he unemploymen changes significanly and inversely o he economic growh in Nigeria. Du, Mira, and Ranjan (2009) and Felbermayr, Pra, and Schmerer (2011b) had empirically esed he relaionship beween rade openness and unemploymen by using cross secion and panel daa for he high qualiy OECD counries respecively. They came up wih he findings ha here

8 The Impac of Inflaion and Economic Growh on Unemploymen 8 prevails an inverse relaionship beween rade liberalizaion and unemploymen. Hence, economies which are more open end o have lower rae of unemploymen on average. Berensen, Menzio and Wrigh (2008) explored he inflaion and unemploymen relaionship for he U.S. for he period 1955 o They concluded ha here does exis posiive relaionship beween inflaion and unemploymen, and also hey found his posiive link afer filering ou he higher frequency movemens. Germany. Beyer and Farmer (2007) invesigaed he link beween unemploymen and inflaion by using he daase of he U.S. ranges from They found ha here exiss direc relaionship beween inflaion and unemploymen in he U.S. in long run. The sudies made by Schreiber and Wolers (2007) and Franz (2005) for a case of Germany o sense wheher here prevails long run rade off beween inflaion and unemploymen or here exiss posiive relaionship beween hem. Boh sudies concluded ha here exis an inverse relaion beween inflaion and unemploymen in he long run in case of Germany. Janiak (2006) explored he link beween rade exposure and equilibrium unemploymen. He concluded ha he higher equilibrium unemploymen is dependan on he higher rade exposure. To him, he firms who produce high produciviy will creae more job opporuniies as hey reap higher profis from he marke and hese firms will eliminae he negaive impac of job desrucion which comes ino being due o he exi of he low produciviy firms from he marke. Haider and Haider (2006) highlighed he significance of urbanizaion in Pakisan and hey argued ha unil 2030 he populaion who is living in he urban areas will elevae by almos 140%. They developed an argumen ha he rapid growh in he urban populaion as share of oal populaion will spread unemploymen in he counry especially among he youh and hence i will change he approach of he people and convince hem o commi crime. They also claimed ha due o urbanizaion; people may mobilize hemselves from he rural areas o urban areas for improving heir living sandard and o search for beer livelihood ino ciies, herefore, he concep of urbanizaion can no be reaed as bad.

9 The Impac of Inflaion and Economic Growh on Unemploymen 9 Silvapulle e al (2004) used he oher way of examining he relaionship beween unemploymen and economic growh. They explored he impac of cyclical oupu on cyclical unemploymen for a case of U.S. by applying dynamic model for pos war period daase. They found wo conclusions from heir sudy; he firs conclusion made by hem was ha he posiive impac of cyclical oupu on unemploymen differs from he negaive impac of cyclical oupu on unemploymen in he shor run, he second conclusion made by hem was ha heir daase suppor his heir proposiion ha he negaive impac of cyclical oupu on cyclical unemploymen is more significan han ha of he posiive impac of cyclical oupu on cyclical unemploymen. Karanassou, Sala and Snower (2003) empirically examined he long run rade off beween inflaion and unemploymen by using Panel Daa Sudy for he European counries. They empirically found ha long run rade off beween inflaion and unemploymen does exis in case of European counries. The researchers like Vandemoorele (1991); Oladeji (1994), Umo (1996), and Rama (1998) invesigaed he impac of unemploymen on economic growh for he African economies and for Nigerian economy in specifically. They found ha as growh rae of unemploymen increases, i curails economic growh and hence hey found rade off beween unemploymen and economic growh. Besides he brief review of lieraure; in he nex par, daa source, model and mehodology for esimaion are presened. Phillips (1958) used daase from 1861 o 1957 for he U.K. in order o es he relaionship beween wage inflaion and unemploymen and concluded ha here exiss an inverse relaionship beween hese wo variables. 3. DATA SOURCE AND METHODOLOGICAL FRAMEWORK 3.1. DATA SOURCES

10 The Impac of Inflaion and Economic Growh on Unemploymen 10 The annual daa for unemploymen as share of Labor Force; Consumer Price Index, Value of Trade, Real GDP per capia, and Urban Populaion as share of Toal Populaion is aken from World Developmen Indicaors, World Bank (2012) for he period ranges from for a counry like Pakisan MODEL The model of his sudy conains five variables wihin which he impac of rade openness along wih oher independen variables is esed on unemploymen for a case of Pakisan. The daa is iniially convered o logarihmic form in order o improve he efficiency of he resuls. Ehrlich (1977), Layson (1983), Bowers and Pierce (1975), Cameron (1994) and Ehrlich (1996) had invesigaed ino heir respecive sudies ha when he daa is convered ino logarihmic form; hen such daase produce more robus resuls. Now he unemploymen funcion is wrien as: LUN = f(lcpi,ltr, LGR,LUB ) The model can be saed as: LUN = α + α LCPI + α LTR + α LGR + α LUB + μ (3.1) C CPI TR GR UB Whereas; = 1, 2, 3,., 38 (ime period is from ) LUN = Unemploymen as share of Labor Force a ime LCPI = Consumer Price Index as Proxy for Inflaion a ime LTR = Trade as Share of GDP a ime LGR = Real GDP Per Capia a ime LUB = Urban Populaion as share of Toal Populaion a ime

11 The Impac of Inflaion and Economic Growh on Unemploymen METHODOLOGY Iniially, he uni roo problem is esed by using Augmened Dickey Fuller (1981) es afer he considering he lag erm of he dependan variable in he equaion of he convenional uni roo es named as Dickey Fuller (1979) es. The main equaion of he Augmened Dickey Fuller (1981) es is menioned as below: p ΔLUN = α+ δlun + φ ΔLUN ε (3.2) j - 1 i = 1 Similarly by following he equaion 3.2, he remaining variables will also be esed for uni roo problem. Aferwards, he long run relaionship among he variables is esed by using Johansen and Juselius Approach (1990) Maximum Likelihood Approach. This approach comprises of wo es saisics such as (a) Trace Saisic and Maximum Eigen Value Saisic. Long run relaionship among he variables is confirmed if he calculaed value from he boh es saisics is greaer han heir respecive criical values. The following equaions help us o esimae hese es saisics: and λ race = (3.3) L L A O λ max = -Tlog(1 - λˆ ) (3.4) r + 1 The lieraure says ha Co Inegraion es should be applied afer finding he maximum lag lengh for he model. Therefore, he maximum lag lengh is esimaed by using Vecor Auoregressive (VAR) Model. Also, he impac of rade openness along wih oher independen variables on unemploymen in long run is found by using fully modified ordinary leas square mehod (FMOLS) and we have used equaion 3.1 for his purpose. In he end, he same impac

12 The Impac of Inflaion and Economic Growh on Unemploymen 12 of independen variables on dependan variable in shor run is found by applying error correcion mechanism (ECM). The equaion of ECM is wrien as below in order o find ou shor run esimaes: ΔLUN λecm = β + C + η - 1 β ΔLCPI CPI + β ΔLTR TR + β ΔLGR GR + β ΔLUB UB + (3.5) Aferwards; esimaed resuls and heir discussion are presened in he following par: 4. RESULTS AND THEIR DISCUSSION Table 4.1 is presened o show he descripive saisics of he model and resuls are given as below: TABLE 4.1 DESCRIPTIVE STATISTICS AND CORRELATION MATRIX LUN LCPI LTR LGR LUB Mean Median Maximum Minimum Sandard Deviaion Skewness Kurosis Jarque-Bera Probabiliy Sum Sum of Square Deviaion ˆ Sample Size = n = ( Y - Y ) 2

13 The Impac of Inflaion and Economic Growh on Unemploymen 13 Table 4.1 shows ha error erm of he model is normally disribued J B es has appeared o be insignifican. Afer he descripive saisics, he uni roo problem is esed by using Augmened Dicky Fuller (1981) es. The resuls of uni roo es are given ino Table 4.2 and hese resuls have shown ha he variables have uni roo problem when hey are esed a level bu when all hese variables are esed a firs difference hen he problem of uni roo have disappeared from all he variables and hence all he variables have become saionary a firs difference. Afer he uni roo es, he maximum lag lengh of he model is found by using Vecor Auoregressive (VAR) Model. The resuls are presened ino Table 4.3 and i has confirmed ha he maximum lag lengh of he model is 2 and i is seleced on he basis of he minimum value of Hannan-Quinn Informaion Crierion. The esimaed resuls for uni roo es and lag lengh crieria are given in he below ables: Table 4.2 and Table 4.3 respecively. TABLE 4.2 UNIT ROOT TEST Augmened Dickey Fuller Tes A Level A Firs Difference Variables Saisics Prob.* Value Variables Saisics Prob.* Value LUN ΔLUN LCPI ΔLCPI LTR ΔLTR LGR ΔLGR LUB ΔLUB % level Criical Values 5% level % level *MacKinnon (1996) one-sided p-values. TABLE 4.3: LAG LENGTH CRITERIA

14 The Impac of Inflaion and Economic Growh on Unemploymen 14 Lags VAR Lag Order Selecion Crieria Log L LR FPE AIC SIC HQ NA 7.12e e * * 6.41e-15* * e * * indicaes lag order seleced by he crierion LR : Sequenial Modified LR Tes Saisic (Each Tes A 5% Level) FPE : Final Predicion Error AIC : Akaike Informaion Crierion SIC : Schwarz Informaion Crierion HQ : Hannan-Quinn Informaion Crierion As i has found ha all variables have become free from uni roo problem a firs difference; herefore, i is more suiable o apply Johansen and Juselius (1990) Maximum Likelihood Approach. The esimaed resuls are given in he below Table 4.4: TABLE 4.4 UNRESTRICTED COINTEGRATION RANK TEST Hypohesized No. of CE(s) Trace Saisic Unresriced Co Inegraion Rank Tes 0.05 Criical Value Prob.** Hypohesized No. of CE(s) Max-Eigen Saisic 0.05 Criical Value Prob.** None * None * A mos 1 * A mos 1 * A mos 2 * A mos A mos A mos A mos A mos Trace es indicaes 3 co-inegraing equaions whereas Max-eigenvalue es indicaes 2 coinegraing equaion a he 0.05 level of significance. * denoes rejecion of he hypohesis a he 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Two ess saisics are used a 5% level of significance in he Johansen and Juselius (1990) maximum likelihood approach and hese ess are (i) Trace saisics and (ii) Maximum Eigen saisics; he resuls given in Table 4.4 have shown ha here are found hree Co

15 The Impac of Inflaion and Economic Growh on Unemploymen 15 Inegraing equaions according o Trace saisics and here are found wo Co Inegraing equaions according o Maximum Eigen saisics. Hence i could be saed ha here exiss long run relaionship among Unemploymen; Inflaion, Trade Openness, Economic Growh and Urban Populaion as share of Toal Populaion in case of Pakisan. Afer finding long run relaionship among he variables of he model, he long run esimaes are found in he below Table 4.5 by using equaion 3.1: TABLE 4.5 ESTIMATED LONG TERM DYNAMICS Dependen Variable: LUN Variable Coefficien Sd. Error -Saisic Prob. LUN LCPI LTR LTR LGR LUB LUB C R Squared Mean Dependen Variable Adjused R Squared S.D. Dependen Variable S.E. of Regression Akaike Informaion Crierion Sum Squared Residual Schwarz Informaion Crierion Log Likelihood F Saisic Durbin-Wason Saisic Prob. Value (F Saisic) Table 4.5 shows ha one period lag erm of unemploymen; inflaion, and one period lag erm of urban populaion are significanly adding o unemploymen in he long run; rade openness is also adding o unemploymen in he long run bu is impac on unemploymen is insignifican. However; he firs period lag erm of rade openness, economic growh, and

16 The Impac of Inflaion and Economic Growh on Unemploymen 16 urban populaion are significanly bu inversely linked o unemploymen in he long run. The model as whole is also significan in he long run. The posiive relaionship of inflaion and unemploymen is more consisen wih he sudies of Rogerson s (1988); Cooley and Hansen (1989), Morensen and Pissarides (1994), Shi (1997), Pissarides (1999), Berensen, Lagos and Wrigh (2005), Lehmann (2006), Beyer and Farmer (2007), Kumar (2008), Berensen, Menzio and Wrigh (2008), and Menzio and Wrigh (2008). The inverse relaionship of economic growh and unemploymen is also consisen wih he sudies of Vandemoorele (1991); Oladeji (1994), Umo (1996), Rama (1998), Silvapulle e al (2004) and Sephen (2012). The negaive impac of urbanizaion on unemploymen in his sudy has denied he findings of Haider and Haider (2006). The posiive relaionship of rade openness wih unemploymen in his sudy is no consisen wih he findings made by Du; Mira, and Ranjan (2009) and Felbermayr; Pra, and Schmerer (2011b). Afer finding he impac of independen variables on unemploymen for he long run ime, now he impac of hese independen variables is esed on unemploymen for he shor run ime for a case of Pakisan and he resuls are given in he below Table 4.6: TABLE 4.6 ESTIMATED SHORT TERM RESULTS Dependen Variable: ΔLUN Variable Coefficien Sd. Error -Saisic Prob. ΔLUN ΔLCPI ΔLTR ΔLGR ΔLGR ΔLUB ΔLUB ECM C R Squared Mean Dependen Variable

17 The Impac of Inflaion and Economic Growh on Unemploymen 17 Adjused R Squared S.D. Dependen Variable S.E. of Regression Akaike Informaion Crierion Sum Squared Residual Schwarz Informaion Crierion Log Likelihood F Saisic Durbin-Wason Saisic Prob. Value (F Saisic) Table 4.6 shows ha one period lag erm of unemploymen and inflaion are insignificanly adding o unemploymen in he shor run; economic growh and is firs period lag erm are insignificanly reducing unemploymen even in shor run, bu urban populaion is significanly declining unemploymen in he shor run and hen rade openness and firs period lag erm of urban populaion are significanly adding o unemploymen in he shor run in case of Pakisan. In he end, he firs period lag erm of he error erm is also negaive and significan which is showing ha he model of his sudy does mee he convergence hypohesis which means ha if here emerges any disequilibrium in he long run sable equilibrium due o shor run flucuaions hen i will be adjused again and i will ake around 0.88 years o achieve long run sable equilibrium and hence concluding ha he pace of adjusmen is quie srong. The model as whole is also significan for he shor run ime. 5. CONCLUSION AND RECOMMENDATIONS 5.1. CONCLUSION This sudy examines he impac of inflaion; rade openness, economic growh, and urban populaion as share of oal populaion on unemploymen boh in long erm and in shor erm in case of Pakisan for he period ranges from I has found ha unemploymen lagged by one year and inflaion are affecing significanly o unemploymen in he long run bu hese facors are insignifican affecing o unemploymen in he shor run. Trade openness has insignifican impac on he unemploymen in he long run

18 The Impac of Inflaion and Economic Growh on Unemploymen 18 bu in he shor run he impac of rade openness on unemploymen becomes significan and posiive. The rade openness lagged by one year is also significan in he long run bu i has an inverse relaion wih unemploymen. Also, economic growh reduces unemploymen significanly in he long run bu his impac of economic growh on unemploymen remains negaive. However, he unemploymen responds insignificanly o he changes in he economic growh in he shor run. Moreover, he economic growh lagged by one year also remains insignifican in he shor run and he relaionship of he economic growh lagged by one year and unemploymen has appeared o be negaive. Las bu no he leas; he impac of urban populaion as share of oal populaion on unemploymen significan and negaive in he boh long run and shor run respecively, bu, he urban populaion as share of oal populaion lagged by one year is significanly raising unemploymen in he boh long run and shor run respecively in case of Pakisan RECOMMENDATIONS The lieraure and he findings of his sudy have confirmed ha inflaion and economic growh have significan relaionship wih unemploymen. Therefore; argeing unemploymen via inflaion and economic growh channel will be more helpful in case of Pakisan. This sudy proposes recommendaions o conrol inflaion and hese recommendaions are given as below: 1. As i has found ha inflaion has a significan and posiive relaion wih unemploymen in he long run; herefore, boh fiscal and moneary auhoriies mus design policies in such a way ha inflaion would come down. The fall in he inflaion will evenually decrease unemploymen. 2. The findings have repored ha as economic growh increases; i significanly decreases unemploymen in he long run and shor run respecively. I means ha boh fiscal and moneary auhoriies mus se up an environmen which could flourish invesmen

19 The Impac of Inflaion and Economic Growh on Unemploymen 19 opporuniies in he counry. Increase in invesmen will increase producion and employmen in he counry and hence unemploymen will decline. 3. Anoher facor which is significanly hiing unemploymen is increase in he size of he populaion in he ciies. I has winessed ha due o increase in he size of he urban populaion; unemploymen has significanly reduced ino boh long run and shor run respecively. This sudy proposes ha as size of he urban populaion expands governmen mus ensure ha he supply of availabiliy of resources remains larger as compared o he increase in he size of he urban populaion. unemploymen will increase raher decreasing. Oherwise, he 4. Lasly, i has also found ha rade openness is insignificanly affecing unemploymen in he long run; bu, in he shor run, rade openness is significanly increasing unemploymen in he counry. Openness o rade may be beneficial o reduce unemploymen if boh fiscal and commercial policies are formulaed by increasing he skills and educaion of he working labor force; by inroducing research and developmen o he firms and by reducing impor duies on he impors of advanced and modern echnology. All his will enhance producion aciviies in he counry and hence he employmen will increase and unemploymen will come down.

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