Impact of Economic Growth and Inflation on Unemployment in Bangladesh: A Time Series Analysis

Abstract

This study investigates the effect of economic growth and inflation on unemployment in case of Bangladesh using time series data considering the period of 1991 to 2015. Variables of the study include unemployment as a dependent variable and economic growth, inflation, industry and age dependency ratio as an explanatory variable. Simple descriptive statistics, Augmented Dicky-Fuller test and Ordinary Least Square (OLS) method have been applied in this paper. Results of Augmented Dicky-Fuller test shows that there is no unit root problem as all the variables are stationary at level. The OLS estimation displays that economic growth has insignificant positive impact on unemployment concluding invalidity of Okun’s Law and inflation has insignificant negative impact on unemployment confirming Phillips curve in Bangladesh. It also shows that industry inversely affect unemployment. Also the impact of age dependency ratio on unemployment is found to be statistically inversely significant. Diagnostic result of the study shows that the model is free from heteroscedasticity, first order positive autocorrelation and multicollinearity. The R-squared value is 43.33% for the model; therefore the model delivers a comparatively good fit of the data.