Macroeconomic forces behind youth unemployment in Somalia: a VECM approach

Abstract

This paper uses Vector Error Correction model framework to investigate the macroeconomic factors influencing youth unemployment in Somalia. To ensure the robustness of the long-run estimates, Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimators are also applied. A structural collection of sector-specific macroeconomic variables, including GDP, trade openness, government spending, and urbanization, are included in the study together with dummy variable that is pertinent to policy. The error correction term shows a rapid rate of adjustment toward equilibrium, and the Johansen cointegration results show stable long-term link between the variables. Long-term estimates indicate that while urbanization raises youth unemployment, GDP trade openness, and government spending considerably reduce it. The effects of changes in GDP, trade openness, government spending, and policy changes on youth unemployment are further identified by the short-run dynamics. Although Granger causality, which goes from government expenditure to youth unemployment, exhibits limited directional predictability, variance decomposition results demonstrate that GDP and government spending are the primary drivers of changes in youth unemployment. According to empirical data, economic growth, trade openness, and effective state spending can all significantly contribute to lowering youth unemployment in Somalia.