Unemployment and Economic Growth: A Cross-Sectionally Autoregressive Distributed Lag (SC-ARDL) and Dynamic Common Correlated Effects (DCCE Panel) for North African Countries

Mustapha Djaballah

doi:10.18290/pepsi-2023-0005

Mustapha Djaballah University of Mohamed Boudiaf, Msila https://orcid.org/0000-0001-8722-2359

DOI: https://doi.org/10.18290/pepsi-2023-0005

Keywords: North African countries, unemployment rate, economic growth, CSARDL, DCEE

Abstract

This paper is aimed at examining the relevance of the dynamics relationship between unemployment and economic growth in North African countries from 2006 to 2022. The study adopted Panel ARDL model and Dumitrescu-Hurlin panel Granger causality analysis that allows capturing slope heterogeneity among each member. The results obtained from the cointegration technique of (Pesaran & Shin, 1999) confirm that a long-term relationship exists between growth and unemployment rate. The purpose of this study is to investigate the relationship between economic growth and unemployment in North African countries for the period of 2006–2022 within panel data framework by applying cs-ARDL and common correlated effects in a dynamic panel (DCCE).

In this paper this relationship has been examined in the context of Okun’s Law. Panel Unit Root with 2nd generation and Westerlund cointegration test were applied, respectively. The results show that the economic growth and unemployment series are stationary at first difference, unemployment was affected positively by economic growth, in other words 1% rise in GDP will decrease the unemployment rate by 0.05% because of Okun’s coefficient for North African countries and there is a co-integration between these important macroeconomic variables.

References

Aaronson, D., Mazumder, B., & Schechter, S. (2010). What is behind the rise in long-term unemployment? Economic Perspectives, 34(2).

Abdulsalam, S. A., & Badiru, A. (2016). The impact of unemployment and inflation on economic growth in Nigeria (1981–2014). International Journal of Business and Economic Sciences Applied Research (IJBESAR), 9(1), 47–55. http://hdl.handle.net/10419/144673

Ahmed, A., Arched, A., & Zaman, K. (2013). The long run relationship between unemployment and economic growth in selected SAARC Countries. Economic Research Guardian, 3(2), pp. 70–85.

Bai, J., & Ng, S. (2001). A PANIC attack on unit roots and cointegration [Working paper 519]. Boston College Department of Economics.

Bai, J., & Ng, S. (2002). Determining the number of factors in approximate factor models. Econometrica, 70(1), 191–221.

Bai, J., & Ng, S. (2004). A panic attack on unit roots and cointegration. Econometrica, 72(4), 1127–1178.

Baltagi, B. H., Feng, Q., & Kao, C. (2011). Testing for sphericity in a fixed effects panel data model. The Econometrics Journal, 14(1), 25–47.

Banda, H., Ngirande, H., & Hogwe, F. (2016). The impact of economic growth on unemployment in South Africa: 1994-2012. Investment Management and Financial Innovations, 13(2–1), 246–255. https://doi.org/10.21511/imfi.13(2-1).2016.11

Bande-Ramudo, R., Fernandez-Grela, M., & Riveiro-Garcia, D. (2014). Consumption, investment and unemployment: SVAR tests of the effects of changes in the consumption-saving pattern. Cogent Economics & Finance, 2(1), 2–7. https://doi.org/10.1080/23322039.2014.933676

Bayar, Y. (2016). Financial development and unemployment in emerging market economies. Scientific Annals of Economics and Business, 63(2). https://doi.org/10.1515/saeb-2016-0119

Breusch, T., & Pagan, A. (1980). The Lagrange Multiplier Test and its application to model specification in econometrics. Review of Economic Studies, 47, 239–254.

Cheung, Y.-W., & Lai, K. S. (2000). On cross-country differences in the persistence of real exchange rates. Journal of International Economics, 50(2), 375–397. https://doi.org/10.1016/S0022-1996(98)00079-8

Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20, 249–272. https://doi.org/10.1016/S0261-5606(00)00048-6

Chudik, A., & Hashem Pesaran, M. (2015). Common correlated effects estimation of heterogeneous dynamic panel data models with weakly exogenous regressors. Journal of Econometrics, 188(2), 393–420. https://doi.org/10.1016/j.jeconom.2015.03.007

Daly, M., Delaney, L., Egan, M., & Baumeister, R. F. (2012). Childhood self-control and unemployment throughout the life span: Evidence from two British cohort studies. Psychological Science, 26(6) 709–723. https://doi.org/10.1177/0956797615569001

Dumitrescu, E.-I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1450–1460.

Holmes, H., & Silverstone, B. (2006). Okun’s law, asymmetries and jobless recoveries in the United States: A Markov-switching approach. Economics Letters, 92(2), 293–299.

Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53–74.

Khrais I., & Al-Wadi M. (2016). Economic growth and unemployment relationship: An empirical study for MENA countries. International Journal of Managerial Studies and Research, 4(12), 19–24.

Lalive, R. (2007). Unemployment benefits, unemployment duration, and post-unemployment jobs: A regression discontinuity approach. American Economic Review, 97(2), 108–112.

Le Barbanchon, T. (2016, September). The effect of the potential duration of unemployment benefits on unemployment exits to work and match quality in France. Labour Economics, 42, 16–29.

Levin, A., & Lin, C. (1992). Unit root tests in panel data: Asymptotic and finite-sample properties. University of California working paper, 92–23.

Levin, A., Lin, C., & Chu, C.-J. (2002). Unit root tests in panel data: Asymptotic and finite sample properties. Journal of Econometrics, 108, 1–24.

Lozanoska, A., & Dzambaska, E. (2014). Economic growth and unemployment: An empirical analysis a case study on the Republic of Macedonia. Economic Development/Ekonomiski Razvoj, 16(3), 153– 169.

Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631–652.

Makun, K., & Azu, N. P. (2015). Economic growth and unemployment in Fiji: A cointegration analysis. International Journal of Development and Economic Sustainability, 3(4), 49–60.

Michaillat, P. (2012). Do matching frictions explain unemployment? Not in bad times. American Economic Review, 102(4), 1721–1750.

Moon, H. R., & Perron, B. (2008). Asymptotic local power of pooled t-ratio tests for unit roots in panels with fixed effects. Econometrics Journal, 11, 80–104.

Moon, H. R., & Perron, B. (2009). Beyond panel unit root tests: Using multiple testing to determine the non stationarity properties of individual series in a panel [Unpublished manuscript].

Nagel, K. (2015). Relationships between unemployment and economic growth–the review results of the theoretical and empirical research. Journal of Economic Management, 20, 64–65.

Nekoei, A., & Weber, A. (2017). Does extending unemployment benefits improve job quality? American Economic Review, 107(2), 527–561

Okun, A. M. (1963). Potential GNP: Its measurement and significance (Cowles Foundation Paper, pp. 98–103). Yale University.

Pesaran, H., Shin, Y., & Smith, R. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(2), 621–634.

Pesaran, M., Shin, Y., & Smith, R. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.

Pesaran, M. H. (2004, August). General diagnostic tests for cross section dependence in panels. University of Cambridge, USC and IZA Bonn Discussion Paper No. 1240.

Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applies Econometrics, 22, 265–312.

Phillips, P. C. B., & Sul, D. (2003). Dynamic panel estimation and homogeneity testing under cross section dependence. Econometrics Journal, 6, 217–259.

Phiri, A. (2014). Nonlinear co-integration between unemployment and economic growth in South Africa. Managing Global Transitions, 12(4), 303.

Rahman, M. S. (2013). Relationship among GDP, per capita GDP, literacy rate and unemployment rate. British Journal of Arts and Social Sciences, 14(2), 169–177.

Ruxandra, P. (2015). The specifics of Okun’s law in the Romanian economy between 2007 and 2013. Annals – Economy Series, 1, 50–53

Saungweme, T., & Odhiambo, N. (2019). The impact of domestic and foreign public debt on economic growth: Empirical evidence from Zimbabwe [Working Paper No. 25663]. University of South Africa, Department of Economics.

Sahnoun, M., & Abdennadher, C. (2019). Causality between inflation, economic growth and unemployment in North African countries. Economic Alternatives, 1, 77–92.

Shimer, R., & Werning, I. (2007). Reservation wages and unemployment insurance. Quarterly Journal of Economics, 122(3), 1145–1185. https://doi.org/10.1162/qjec.122.3.1145

Soylu, Ö. B., Çakmak, İ., & Okur, F. (2018). Economic growth and unemployment issue: Panel data analysis in Eastern European Countries. Journal of International Studies, 11(1), 93–107. https://doi.org/10.14254/2071-8330.2018/11-1/7

Suleiman, S., Hemed, I., & Kassim, S. T. (2017). Unemployment and economic growth in Tanzania. Journal of Economics, Management and Trade, 20(2), 1–8, Article JEMT.38500.

Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x