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Theoretical and Applied Economics
No. 1 / 2019 (618), Spring

The relationship between unemployment and some macroeconomic variables: Empirical evidence from India

Malayaranjan SAHOO
National Institute of Technology (NIT) Rourkela, Odisha, India
Jayantee SAHOO
University of Hyderabad, India

Abstract. The study examined the relationship between some macro-economic variables and unemployment in India, it focuses on the impact of some macroeconomic variables on unemployment for the period 1991-2017.Cointegration test and its associated vector error correction model (VECM) and Granger causality test were used in the analysis. The variables such as unemployment rate (UNEMP), real gross domestic product (RGDP) used as common proxy for economic growth, consumer price index used as proxy for inflation, Gross fixed capital formation, literacy rate and labour force were employed in the investigation. Stationarity test was conducted through the application of the Augmented Dickey - Fuller (ADF) test, and the results indicated that all the variables became stationary after first differencing. Furthermore, the result of the Johansen cointegration test revealed that significant long run relationship exists among UNEMP, GDP, INFL, LF, LR and GFCF. Similarly, VECM shows that the economic unemployment of India is somewhat predictable by the given explanatory variables. In the VECM, intercept β_0 is positive 0.147108 and significant at 1% level indicating overall unemployment’s increases proportionately during that period. Finally, the result of the Granger causality test indicated unidirectional relationship between UNEMP and RGDP with causality running from RGDP to UNEMP. From gross domestic product, domestic private investment (GFCF) and labour force significantly causing unemployment as per there probability value. There is bi-directional Granger causality between labour force and unemployment Based on these findings, the study therefore recommends that government should as a matter of urgency create more employment opportunities in order to absorb the teeming population of the unemployed work force in the country through modernization of the agricultural sector, bring in modern equipment in the facilities of agriculture to make the sector more attractive to all citizens despite one’s qualifications and profession.

Keywords: unemployment; economic growth; co-integration; Granger causality India.

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