Impact of macroeconomic factors on unemployment dynamics in Sri Lanka (1980 -2023) : an ARDL bounds testing approach

Abstract

Introduction

Unemployment remains a persistent challenge for many developing nations, and Sri Lanka is no exception. Despite periods of moderate economic growth, the country continues to grapple with high unemployment rates particularly among youth and women. According to the Department of Census and Statistics (2024), the youth unemployment rate stands at 20.6%, with a stark gender disparity: 16.3% for males and 29.5% for females in the 15–24 age group. These statistics highlight structural weaknesses in Sri Lanka’s labour market, including limited job creation, distribution of job Macroeconomic factors such as GDP growth, inflation, educational expenditure, government activities, foreign direct investment (FDI), and labour force participation significantly shape unemployment dynamics. For example, Sri Lanka’s public investment in education is mostly below 2% of GDP, limiting the development of technical and vocational skills critical for employment. Similarly, while FDI can be a potential driver of job creation, much of it in Sri Lanka has been directed toward capital-intensive sectors like infrastructure and telecommunications, with limited employment impact.

Several empirical studies have examined the macroeconomic and structural determinants of unemployment in Sri Lanka, offering nuanced insights into the complexities of the labour market. Madushani and Madurapperuma (2023), employing the ARDL bounds testing approach for the period 1990– 2020, found that GDP, FDI, and population growth significantly influenced unemployment in both the short and long run, while inflation exerted a long-run effect only. Karunarathna et al, (2023) examined the relationship between economic growth and unemployment in Sri Lanka from 2001 to 2020 using a simple linear regression model. Economic growth rate was treated as the independent variable and unemployment rate as the dependent variable. The results showed a negative relationship, and it implies that a 1% increase in economic growth leads to a 0.072% decrease in unemployment. The study concludes that reducing unemployment is essential for promoting long-term economic growth, reducing poverty, and minimizing inequality in Sri Lanka.

This study looks at why unemployment in Sri Lanka has stayed high from 1980 to 2023, even when the economy was growing. It explores how key economic factors like GDP growth, foreign investment, labour force participation, education spending, and inflation affect unemployment in both the short and long run.