Abstract:
It is crucial to study the effect of inflation and economic growth on unemployment
because unemployment is an important economic indicator in both developed and
developing countries. The secondary data was collected from Central Bank
Annual reports for 1960-2019, Sri Lanka. The collected data on Gross Domestic
Product growth (GDP-annual %), inflation (consumer price, annual %), and
unemployment rate (annual %) were analyzed using E-views 10. The descriptive
analysis and the correlation analysis were used to check the basic behavior of the
selected variables. According to the results of the correlation, the unemployment rate was
negatively correlated with both inflation and economic growth. Furthermore, the
stationary property or the unit root of the selected variables was checked using
the Augmented Dickey-Fuller test. The unit root test results revealed that the GDP
growth, inflation, and the unemployment rate were stationary at a level. The ordinary
least square method (OLS) was implied to estimate the unknown parameters in
the linear regression model. Agreeing to the results of regression analysis, the
coefficients of inflation and GDP growth were negative, thus both had shown a
significant negative influence on unemployment. Consequently, the Granger
Causality test was performed to check the causality among the selected variables
and found there was only unidirectional causality exists between inflation and
unemployment rate in Sri Lanka. The model validity and stability were checked
and found the coefficients of the model parameter are unstable. Therefore, the study
concluded that inflation and economic growth reduce unemployment but the
influence on unemployment seems to be insignificant.
