Relationship between Unemployment Rate and Economic Growth in Nepal: An Econometric Estimation

Abstract

Economic growth and employment are taken as the two major objectives of macroeconomic policy schema in both the developing as well as developed countries. This study aims to determine the relationship between the unemployment rate and GDP growth rate of Nepal using the time-series data from 1991-2020. Difference version approach, dynamic version approach and Granger causality test were used to study the relationship between the macroeconomic variables. The difference version and dynamic version approach showed non-significant results for the regression of unemployment rate on economic growth rate which implies that the unemployment rate is not significantly affected by the economic growth rate of Nepal. The Okun‘s coefficient in the difference version was -0.057 and in the dynamic version approach it was -0.058. Thus, the Okun‘s law doesn‘t seem to hold in case of Nepal‘s economy. The Granger causality test also revealed that the change in the unemployment rate is not a predictive variable of the GDP growth rate and vice versa. The non-significant relationship between the macroeconomic variables might thus be affected by other factors. Thus, it can be suggested to the government and policymakers to recuperate the ways of solving the unemployment by formulating economic policies that are more directed towards structural and labor market transformation. Tax reduction policy, increase in government spending, skill enhancement programs and youth employment subsidy can also be suggested.