Macroeconomic Determinants of Unemployment in Somalia: The Case of Okun’s Law and the Phillips Curve

Abstract

This study aims to assess the impact of economic growth and inflation on unemployment in Somalia by testing the Phillips curve and Okun’s law hypothesis utilizing the autoregressive distributed lag (ARDL) model and time series data covering the period from 1991 to 2017. The empirical results reveal the existence of long-run cointegration among the variables. Moreover, a negative relationship is established between economic growth and unemployment both in the short run and long run, hence confirming the validity of Okun’s law hypothesis in Somalia. The impact of inflation on unemployment is inconsequential in the long run, although a strong negative association exists in the short run, thus supporting the presence of the Phillips curve hypothesis in Somalia in the short run. The study recommends that policymakers should enact policies that favor economic growth to mitigate unemployment and create a balance between the required level of inflation and unemployment in Somalia.

A Verification of Okun’s Law: The Case of Southeast Asian Countries

“…Blinova et al (2020) stated that a change in production volume makes a dynamic variation in the unemployment rate in Russia. According to Warsame et al (2022), there is long-run and short-run cointegration between economic growth and inflation and the unemployment rate in Somalia. Further, they stated that inflation gets inconsequential to unemployment in the long run but has a negative association in the short run.…”

“…The economic and social aspects of unemployment contribute to its complexities, needing an in-depth analysis to understand the causes and ramifications and propose effective solutions. Underemployment occurs when people's incomes are insufficient to cover their basic needs (Warsame et al, 2022). There is also "disguised unemployment," in which workers accept positions below their education and experience level (Earle & Sakova, 2000).…”

The Relationship Between Foreign Aid and Economic Growth: Empirical Evidence from Somalia

“…The Keynesian paradigm of economic expansion [8,16] studies the role that foreign aid plays in bridging the savings gap and spurring domestic investment, which helps developing countries grow their economies more quickly. According to Rosenstein-Rodan [17], the well-known bigpush principle, an underdeveloped economy to address growth hurdles, a minimum amount of high investment is required.…”

“…Somalia is a one of the poorest countries in the world with high inflation and unemployment rates [7,8], and energy insecurity [9,10]. Foreign aid remains a crucial for economic growth and infrastructure development.…”