THE EFFECT OF ECONOMIC GROWTH ON UNEMPLOYMENT RATE

Abstract

Despite the continuous economic growth in Tanzania, unemployment remains a persistent challenge, making the need for further studies on the dynamics between economic growth and unemployment. This study addresses this gap by exploring both the short-run and long-run effects between these key macroeconomic variables. The specific objectives are to examine the long-term impact of economic growth on unemployment, analyse the short-run effects of growth on unemployment, and assess the influence of inflation on unemployment. Drawing on 34 annual observations from Tanzania’s macroeconomic data, the study utilizes the Autoregressive Distributed Lag (ARDL) model to analyse both short-run and long-run effects, while the Error Correction Model (ECM) measures the speed of adjustment to equilibrium after short-term fluctuations. The results show a significant inverse long-run effect between economic growth and unemployment, with a 1% increase in economic growth leading to a 0.35% reduction in unemployment. In the short run, however, the effect is delayed, with the effects of growth on unemployment materializing after a lag. Additionally, the study confirms an inverse effect between inflation and unemployment, consistent with the Phillips curve, although the impact of inflation is relatively modest. The study recommends that policymakers focus on fostering inclusive economic growth, particularly in labour-intensive sectors such as agriculture and manufacturing, to reduce unemployment more effectively. Additionally, improving labour market flexibility and addressing structural issues like skills mismatches and the large informal sector are essential. Managing inflation at moderate levels is also recommended to support sustainable employment growth in Tanzania.