Macroeconomic Determinants of Unemployment: Empirical Evidence from Economic Community of West African States

Abstract

Abstract This paper builds on Okun's law and Phillips curve theoretical frameworks to analyse the relationship between macroeconomic aggregates and unemployment in the Economic Community of West African States (ECOWAS). Fixed and random effects, as well as fully modified ordinary least squares (FMOL) panel data estimation techniques are employed on annual data covering 1991 to 2014. Empirical analyses are performed at both aggregate ECOWAS data level and sub‐regional levels, that is, Francophone and Anglophone country levels. Results show that gross domestic product (GDP) growth has a reducing but insignificant effect on unemployment rate, which indicates low employment elasticity of growth in the region. Inflation has an overwhelming positive impact on unemployment, indicating invalidity of the Phillips curve hypothesis. Another important finding of the paper is the positive impact of labour productivity on unemployment rate, reflecting a trade‐off between labour productivity and employment. Further, FDI and external debt exert a weak negative impact on unemployment, while population growth has an increasing effect. The paper suggests the need for enabling macroeconomic environment that promotes employment generation in the ECOWAS region.