Labour force participation and unemployment rate: does discouraged worker effect hypothesis or unemployment invariance hypothesis hold in Africa?

Abstract

PurposeThe purpose of this study is to examine the existence of discouraged worker effect hypothesis and unemployment invariance hypothesis in Africa, including its five regional groups. Specifically, the study tests the existence of co-integration between different categories of labour force participation and unemployment rate, total male and female labour force participation and the unemployment rate for age brackets 15–24, 15–64 and 15+, respectively.Design/methodology/approachThe study uses the data of 52 countries in Africa which cover the period from 1991 to 2018. Three co-integration estimation techniques namely, the Kao co-integration test, Pedroni co-integration test and Westerlund co-integration test are used to validate the existence of co-integration between the labour force participation and unemployment rate. The dynamic ordinary least square is further used to explore the impact of the unemployment rate on labour force participation, while the pooled ordinary least squares (POLS) that accounts for individual country and time effects is employed for robustness check.FindingsExcept for Southern Africa, it is found that the discouraged worker effect hypothesis holds in Africa and the rest of its regions. This suggests that there is a long-run relationship between labour force participation rate and unemployment rate irrespective of age group and gender classifications. To some extent, the authors discover the existence of cross-sectional dependence in the panel. There is also an inverse relationship between labour force participation and the unemployment rate. This implies that when the unemployment rate is high, labour force participation tends to decline. The results are, however, sensitive to the choice of estimation method.Research limitations/implicationsThe study is limited to the examination of linear co-integration between labour force participation and the unemployment rate in Africa and its five regions. The future study can investigate the possibility of a nonlinear or an asymmetric relationship between labour for participation and the unemployment rate.Social implicationsThus, a policy framework that would generate employment creation is greatly required in Africa.Originality/valueTo the best of the authors’ knowledge, this is a pioneer work that addresses the issue of co-integration between labour force participation and unemployment rate for Africa and its five regions taking into consideration gender and age brackets of labour force participation and unemployment.

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