Lesotho’s unemployment, poverty and income inequality and other social ills remain pervasive in the face of non-inclusive growth. Using structural vector autoregressive framework and annual time series data spanning from 1980 to 2014, this paper investigates the sources of the high unemployment in Lesotho, a small landlocked developing country whose currency is pegged to that of South Africa. The impulse response functions, forecast error variance decomposition and historical decomposition jointly revealed that unemployment dynamics in Lesotho largely emanate from shocks to employment, unemployment itself, productivity, real wages and inflation. The importance of positive shocks to employment and unemployment itself in explaining unemployment variations decline over time while the importance of positive shocks to productivity, real wages and inflation grow with time. In light of this, Lesotho’s government should promote private sector development, diversify the economy’s markets and invest in human and physical capital development with a view to increase employment.
Nordmeier, D. and Weber, E. (2013) Patterns of Unemployment Dynamics in Germany. IAB-Discussion Paper, No. 2/2013.
World Bank (2015) Lesotho-Systemic Country Diagnostic. http://documents.worldbank.org/curated/en/371421468188678379/Lesotho-Systematic-country-diagnostic
Bureau of Statistics (BoS) (2011) 2008 Lesotho Integrated Labour Force Survey. http://www.bos.gov.ls/New%20Folder/Copy%20of%20Demography/2008_ILFS_report.pdf
Bureau of Statistics (BoS) (2014) 3rd Quarter Continuous Multi-Purpose House Hold Survey 2011/2012. http://catalog.ihsn.org/index.php/catalog/4917
Bureau of Statistics (BoS) (2017) 2nd Quarter Continuous Multi-Purpose House Hold Survey 2014/15.
Holte, F.C. (1988) Four Papers on the Theory of Unemployment. Statistisk Sentralbyra.
Goodwin, N.R., Nelson, J.A., Ackerman, F. and Weisskopf, T. (2006) Theories of Unemployment. https://www.saylor.org/site/wp-content/uploads/2010/11/Theories-of-Unemployment.pdf
Dagume, M.A. and Gyekye, A. (2016) Determinants of Youth Unemployment in South Africa: Evidence from the Vhembe District of Limpopo Province.
Balmaseda, M., Dolado, J.J. and Lopez-Salido, J.D. (2000) The Dynamic Effects of Shocks to Labour Markets: Evidence from OECD Countries. Oxford Economic Papers, 52, 3-23. https://doi.org/10.1093/oep/52.1.3
Linzert T. ,et al. (2001)Sources of German Unemployment: Evidence from a Structural VAR Model SSRN Electronic Journal 224, 317-336.
Fabiani, S., Locarno, A., Oneto, G. and Sestito, P. (2000) The Sources of Unemployment Fluctuations: An Empirical Application to the Italian Case. ECB Working Paper, Series No. 29.
Gambetti, L. and Pistoresi, B. (2004) Policy Matters. The Long Run Effects of Aggregate Demand and Mark-Up Shocks on the Italian Unemployment. Empirical Economics, 29, 209-226. https://doi.org/10.1007/s00181-003-0159-3
Maidorn, S. (2003) The Effects of Shocks on the Austrian Unemployment Rate—A Structural VAR Approach. Empirical Economics, 28, 387-402. https://doi.org/10.1007/s001810200137
Reichenbachas, T. (2015) Analysis of the Development of the Unemployment Rate in Lithuania: Application of the SVAR Model. Ekonomika, 94, 86. https://doi.org/10.15388/Ekon.2015.3.8789
Davidescu A.A. ,et al. (2014)Investigating the Impact of Unemployment Rate on the Romanian Shadow Economy: A Complex Approach Based on ARDL and SVAR Analysis Romanian Journal of Economic Forecasting 17, 109-127.
Jacobson, T., Vredin, A. and Warne, A. (1997) Common Trends and Hysteresis in Scandinavian Unemployment. European Economic Review, 41, 1781-1816. https://doi.org/10.1016/S0014-2921(96)00027-X
Algan, Y.P.C. and André, Z. (2002) Public Employment and Labour Market Performance. Economic Policy, 17, 7-66. https://doi.org/10.1111/1468-0327.00083
Christoffel, K.P. and Linzert, T. (2005) The Role of Real Wage Rigidity and Labour Market Frictions for Unemployment and Inflation Dynamics. European Central Bank Working Paper 556.
Karanassou, M. and Sala, H. (2012) Productivity Growth and the Phillips Curve: A Reassessment of the US Experience. Bulletin of Economic Research, 64, 344-366. https://doi.org/10.1111/j.1467-8586.2010.00361.x
Khumalo, Z.Z. (2014) The Determinants of Unemployment in Swaziland: An Econometric Perspective and Investigative Analysis. Doctoral Dissertation.
Eita, J.H. and Ashipala, J.M. (2010) Determinants of Unemployment in Namibia. International Journal of Business and Management, 5, 92-104.
Burger, R. and Fintel, D.V. (2009) Determining the Causes of the Rising South African Unemployment Rate—An Age, Period and Generational Analysis. Stellenbosch Economic Working Papers 24/09.
Banda, H., Ngirande, H. and Hogwe, F. (2016) The Impact of Economic Growth on Unemployment in South Africa: 1994-2012. Investment Management and Financial Innovations, 13, 246-255. https://doi.org/10.21511/imfi.13(2-1).2016.11
Smit, P.C., Mostert, J.W. and Oosthuizen, A.G. (2006) Economics: A South African Perspective. Juta and Co. Ltd.
Sims, C.A., Stock, J.H. and Watson, M.W. (1990) Inference in Linear Time Series Models with Some Unit Roots. Econometrica: Journal of the Econometric Society, 58, 113-144. https://doi.org/10.2307/2938337
Sunde T. ,et al. (2015)The Effects of Monetary Policy on Unemployment in Namibia Journal of Economic and Social Thought 2, 256-274.
Sunde, T. and Akanbi, O.A. (2016) Sources of Unemployment in Namibia: An Application of the Structural VAR Approach. International Journal of Sustainable Economy, 8, 125-143. https://doi.org/10.1504/IJSE.2016.075917
Chow, G.C. and Lin, A.L. (1971) Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series. The Review of Economics and Statistics, 53, 372-375. https://doi.org/10.2307/1928739
Tsonis, A.A. and Austin, G.L. (1981) An Evaluation of Extrapolation Techniques for the Short Term Prediction of Rain Amounts. Atmosphere-Ocean, 19, 54-65. https://doi.org/10.1080/07055900.1981.9649100
Smith, S.K. (1987) Tests of Forecast Accuracy and Bias for County Population Projections. Journal of the American Statistical Association, 82, 991-1003. https://doi.org/10.1080/01621459.1987.10478528
Smith, S.K. and Sincich, T. (1988) Stability over Time in the Distribution of Population Forecast Errors. Demography, 25, 461-474. https://doi.org/10.2307/2061544
Chang, C.C., Chung, S.L. and Stapleton, R.C. (2007) Richardson Extrapolation Techniques for the Pricing of American Style Options. Journal of Futures Markets, 27, 791-817. https://doi.org/10.1002/fut.20272
Gil, A.R. (2012) Causes of Unemployment and the Effectiveness of Demand Policies. Doctoral Dissertation, Leeds University, Leeds.
Akanbi, O.A. and Du Toit, C.B. (2011) Macro-Econometric Modelling for the Nigerian Economy: A Growth-Poverty Gap Analysis. Economic Modelling, 28, 335-350. https://doi.org/10.1016/j.econmod.2010.08.015
Giannini, C. (1991) Topics in Structural VAR Econometrics. Universitadegli Studi di Ancono, Dipartimento di Economia.
Clarida, R. (2001) The Empirics of Monetary Policy Rules in Open Economies. No. w8603, National Bureau of Economic Research. https://doi.org/10.3386/w8603
Lütkepohl, H. (2011) Vector Autoregressive Models. Springer, Berlin Heidelberg, 1645-1647. https://doi.org/10.1007/978-3-642-04898-2_609
Ravnik, R. and Zilic, I. (2011) The Use of SVAR Analysis in Determining the Effects of Fiscal Shocks in Croatia. Financial Theory and Practice, 35, 25-58.
Kofi Ocran, M. (2011) Fiscal Policy and Economic Growth in South Africa. Journal of Economic Studies, 38, 604-618. https://doi.org/10.1108/01443581111161841
Kilian, L. (2011) Structural Vector Autoregressions. In: Handbook of Research Methods and Applications on Empirical Macroeconomics, Edward Elgar Publishing, Cheltenham, 515-554.
Nikolaychuk, S. and Shapovalenko, N. (2014) The Identification of the Sources of Current Account Fluctuations in Ukraine. The Herald of the National Bank of Ukraine, No. 2, 20-27.
Dickey, D.A. and Fuller, W.A. (1979) Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74, 427-431. https://doi.org/10.1080/01621459.1979.10482531
Dickey, D.A. and Fuller, W.A. (1981) Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica: Journal of the Econometric Society, 49, 1057-1072. https://doi.org/10.2307/1912517
Phillips, P.C. and Perron, P. (1988) Testing for a Unit Root in Time Series Regression. Biometrika, 75, 335-346. https://doi.org/10.1093/biomet/75.2.335
Hamilton, D.J. (1994) Time Series Analysis. Princeton University Press, Princeton.
Berkelmans, L. (2005) Credit and Monetary Policy: An Australian SVAR. Reserve Bank of Australia Canberra, ACT, 1-32.
Alom, F., Ward, B.D. and Hu, B. (2013) Macroeconomic Effects of World Oil and Food Price Shocks in Asia and Pacific Economies: Application of SVAR Models. OPEC Energy Review, 37, 327-372. https://doi.org/10.1111/opec.12015
Khan, M. and Ahmed, A. (2014) Revisiting the Macroeconomic Effects of Oil and Food Price Shocks to Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis. OPEC Energy Review, 38, 184-215. https://doi.org/10.1111/opec.12020
Khan, M.A. and Ahmed, A. (2011) Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis. The Pakistan Development Review, 50, 491-511.
Sims, C.A. (1980) Macroeconomics and Reality. Econometrica: Journal of the Econometric Society, 48, 1-48. https://doi.org/10.2307/1912017
Enders, W. (2008) Applied Econometric Time Series. John Wiley & Sons, Hoboken.
Bernanke, B.S. and Mihov, I. (1998) Measuring Monetary Policy. The Quarterly Journal of Economics, 113, 869-902. https://doi.org/10.1162/003355398555775
Bernanke, B.S. (1986) Alternative Explanations of the Money-Income Correlation. Carnegie-Rochester Conference Series on Public Policy, 25, 49-99. https://doi.org/10.3386/w1842
Perotti, R. (2002) Estimating the Effects of Fiscal Policy in OECD Countries. European Central Bank, Working Paper No. 168.
Jacobs, J.P. and Wallis, K.F. (2005) Comparing SVARs and SEMs: Two Models of the UK Economy. Journal of Applied Econometrics, 20, 209-228. https://doi.org/10.1002/jae.839
Sonedda, D. (2006) A Structural VAR Approach on Labour Taxation Policies. Applied Economics, 38, 95-114. https://doi.org/10.1080/00036840500166415
Heppke-Falk, K.H., Tenhofen, J. and Wolf, G.B. (2006) The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis. Deutsche Bundesbank Discussion Paper Series 1: Economic Studies, No. 41/2006. http://econstor.eu/bitstream/10419/19670/1/200641dkp.pdf
Bhuiyan, R. (2008) Monetary Transmission Mechanism in a Small Open Economy: A Bayesian Structural VAR Approach. No. 1183, Queen’s Economics Department Working Paper.
Dungey, M. and Pagan, A. (2009) Extending a SVAR Model of the Australian Economy. Economic Record, 85, 1-20. https://doi.org/10.1111/j.1475-4932.2008.00525.x
Ngalawa, H. and Viegi, N. (2011) Dynamic Effects of Monetary Policy Shocks in Malawi. South African Journal of Economics, 79, 224-250. https://doi.org/10.1111/j.1813-6982.2011.01284.x
Parrado, E. (2001) Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: The Case of Chile. Working Paper No. 108, Banco Central de Chile.
Giordano, R., Momigliano, S., Neri, S. and Perotti, R. (2007) The Effects of Fiscal Policy in Italy: Evidence from a VAR Model. European Journal of Political Economy, 23, 707-733. https://doi.org/10.1016/j.ejpoleco.2006.10.005
Dolado, J.J. and Jimeno, J.F. (1997) The Causes of Spanish Unemployment: A Structural VAR Approach. European Economic Review, 41, 1281-1307. https://doi.org/10.1016/S0014-2921(97)00058-5
Carstensen, K. and Hansen, G. (2000) Cointegration and Common Trends on the West German Labour Market. Empirical Economics, 25, 475-493. https://doi.org/10.1007/s001810000028
Chuku, C., Effiong, E. and Sam, N. (2010) Oil Price Distortion and Their Short-Run and Long-Run Impacts on the Nigerian Economy. MPRA Paper 24434, 1-30.
Burbidge, J. and Harrison, A. (1985) An Historical Decomposition of the Great Depression to Determine the Role of Money. Journal of Monetary Economics, 16, 45-54. https://doi.org/10.1016/0304-3932(85)90005-4
Christiano, L.J., Eichenbaum, M. and Evans, C.L. (1999) Monetary Policy Shocks: What Have We Learned and to What End? Handbook of Macroeconomics, 1, 65-148. https://doi.org/10.1016/S1574-0048(99)01005-8