Estimating the Cost of Unemployment to Uganda’s Growth and Growth Trajectory 1980-2016: ‘an auto-regressive distributed lag modelling approach’

Over the years, there has been a considerable discourse around the cost as well as the nexus between unemployment and economic growth in both developing and developed countries. This relationship has remained an economic puzzle and to date, no conclusive position has been reached. The debate has continued to attract the attention of researchers, academicians and policy makers. From Uganda’s context, less effort has been invested in trying to unpack this phenomenon. This paper therefore, investigates the cost that unemployment actually imposes on the country’s growth performance as theoretically explained by the ‘Okun’s Law’. The study utilizes an Auto Regressive Distributed Lag (ARDL) Model on annual time series data for the period 1980-2016. The results reveal that Uganda loses approximately UGX 6.7 Trillion, an equivalent of USD 1.8 Billion annually due to the current unemployment rate. The cost is even higher when unemployment is re-estimated to exclude volunteers and unpaid family workers and adjusting the number of hours from one to five hours a week. In this case, the cost of unemployment rises to approximately UGX 60.3 Trillion, an equivalent of USD 16.3 Billion annually due to the current unemployment rate. In summary, the study finds that unemployment has a real cost to Uganda’s economic growth and growth trajectory and confirms Okun’s law in the country both in short and long run. In fact, the study reveals that, a one percentage point increase in unemployment rate costs Uganda’s growth an average of 0.067 percentage points annually. Using these findings to estimate the growth trajectory, the study results indicate that Uganda will attain the per capita income goal of USD 9500 in the year 2070 not 2040 if the current unemployment trend remains on its current course. The conclusion from the study is that, addressing unemployment problem should remain core and top in the country’s development agenda if the country is to achieve the targeted growth performance as signposted by the country’s Second National Development Plan (NDPII) and the Uganda vision 2040. The recommends the need to ensure integration of unemployment or employment concerns into the national planning and budgeting frameworks. Indicators to track the labour market functionality especially in regard to employment generation should be included in the results framework of the country’s national development plans (NDPs) and the national budgets; and more so, monitored and reported on an annual basis