The Impacts of Unemployment in Zimbabwe from the period 2009-2019

A Research Proposal By

Thelma Wiri

R177660T

Submitted in partial fulfillment of the requirements of degree:

Bsc .Hon in Economics

Faculty of Social Studies

Supervisor Mr Muhoyi

24 April 2019
ABSTRACT
Unemployment is a major problem in Zimbabwe.It has risen so high that the young
graduates are demoralized and discouraged because they are jobless with requisite
qualifications.The research was will be to study how unemployment affected
economic growth hence capacity utilization in Zimbabwe and assess the effects of
unemployment on the well-being of citizens of Zimbabwe.

TABLE OF CONTENTS

INTRODUCTION............................................….................................1
1.0Overview............................................................................................1
1.1Background........................................................................................1
Problem Statement....…...........................................................................4
1.3.0Purpose of Study...................................................................….......5
1.3.1Research Objectives.................................................................5
1.3.2Research Quest…...................................................................5
1.3.3Hypotheses........................................................................................7
1.3.4Significance of Study........................................................................7
LITERATURE REVIEW..........................................8
2.0 Overview.............................................................................................8
2.1.1Theoretical Review............................................................................8
2.1.2Empirical Review...............................................................................8

METHODOLOGY.....………….……..……….……………...............9
3.0Type of study……………………………………………………………..9
3.1Data Collection Methods………………………………………………….9
3.2The Sampling Design……………………………………………………..9
3.3Data Anaylsis……………………………………………………………..9
1.0. Introduction

Unemployment is defined as being able and willing to work at the going wage but not in a
job (Mankiw) . Economic growth can be measured in terms of the gross domestic output
which is defined as the value of final goods and services produced within the boundaries of a
country within a time period. Unemployment is an economic variable which has a very
important effect on economic growth. Zimbabwe is one of the countries in Africa that has
the highest formal unemployment rate above 50% according to the Zimbabwe Agenda for
sustainable transformation (Zim Asset, 2013). However the rate of unemployment in
Zimbabwe has been disputed and it has been pegged at 95% (CCIA World Fact Book,2011) .
Unemployment rate in Zimbabwe is disputed to be ranging from 11% to 95% . ZimStat has
pegged unemployment rate at 11% which has been criticised as a gross underestimate of the
problem. However according to the state of the economy in everyday economic situation it is
indisputable that the unemployment rate in Zimbabwe is much higher. This study seeks to
account for the negative impacts unemployment has caused on economic growth hence the
lives of the Zimbabwean people. Resources should be fully utilized and channelled to
profitable investments (Osunobi, 2005). As a result of failing to utilize and channel resources
in a productive manner then a nation will have continual problems of unemployment and
poverty. This is true in Zimbabwe as the country continues to face worsening unemployment
levels , inflation , adverse policies , gross mismanagement, industry incapacitation.
Unemployment is undesirable and it significantly contributes to the widespread poverty and
income inequality in Zimbabwe . Furthermore unemployment and poverty have led to
increases in crime , morbidity , and social unrests. The failure of the rate of job creation in
Zimbabwe to match the growth of the labour force reflects the inability of the domestic
economy industrialization hence the influence of unemployment on economic growth needs
to be investigated . There is a gap in the actual level of unemployment established in
Zimbabwe thus the full impact of unemployment on the level of standards of living in
Zimbabwe may not be fully investigated and people face issues of high levels of stress ,
poverty , inequality that are not addressed but are actually happening in the economic
reality of the Zimbabwean people.

1.1. Background of Study

Zimbabwe’s manufacting industry is struggling with most companies operating below full
capacity. Capacity utilization was 18,9% in 2009 , 57% in 2011 and 39,6% in 2013 (CZI , 2014).
According to the Parliament Budget Office (PBO,2018) the Confederation of Zimbabwe's
Industries (CZI,2017) capacity utilization in Zimbabwe's manufacturing sector declined from
47, 4℅ in 2016 to 45,1℅ in 2017.Capacity utilization has been constrained by high production
costs and shortages of foreign currency which has triggered the systematic increase in the
prices of local commodities. Zimbabwe has had economic contraction and worst case of
inflation in 2009. According to the World Bank the Gross Domestic Product increased by 4%
from 2017 to 2018. Industry incapacitation has led to immense growth in the informal
sector .The high unemployment rate has unavoidably led to increase in informal jobs without
increase in real output. Human capital has been underutilized for decades in Zimbabwe thus
leading to the decline of the economy. Labour is a positive variable input in the production
process , however in Zimbabwe labour is hardly employed in the formal sector thus output
is negatively affected. There has also been mismanagement of the various sectors of
production for example the agricultural industry and as a result masses of able bodied
youths moved from the rural to urban areas in search of the non existing white collar jobs.
The informal sector grew as Zimbabwe was now implementing indigenization policy as of
2008. As a result of unemployment indigenization and economic empowerment did not
achieve economic independence in Zimbabwe because the majority unemployed population
could not transition between unemployment and self employment with little or no
institutional support.

The unemployed are expected to endeavour to follow entrepreneurial success stories but
they are simply unable to deal with the risk attached to starting their own businesses amid
the conditions of personal crisis within the global context of economic uncertainty.

1.2. Problem Statement

The statement of the problem is based on the economic ,social and political effects of
unemployment. Unemployment rose sharply after the year 2000 as Zimbabwe embarked on
fast track land reform. Many farm owners were displaced by new farmers as they were
thought to be aligned to former white farmers. Subsequently Zimbabwe was sanctioned and
the World Bank suspended financial aid to Zimbabwe. Hence capacity utilization declined
dismally , companies closed and the country entered into economic recession . By the year
2009 unemployment and inflation had soared to unacceptable levels. Utilization of factors of
production ( capital and labour) declined heavily leading to failure by companies to
recapitalize . The industry failed to absorb all job seekers . Okun's statistical assessment of
the relationship that exist between unemployment and economic growth shows that the loss
of resources particularly human resources is a problem that unemployment creates as
people will not be able to put their skills and talents to productive use leads to failure to put
the economy to its full potential. Economic growth is fundamental for the development of an
economy . Economic growth is created by the labour force thus it is imperative to have
skilled workers in an economy. However labour should be employed in all sectors of
production in order to maximize production capacity. Economic growth should be close to
the rate of its potential capacity and to reduce the unemployment rate the economy must
grow at a pace above its potential.

The problem under investigation is the huge burden of unemployment hence poverty and
social deprivation faced by Zimbabweans since the early 2000s until 2019. The research
question at the heart of this study is , therefore ,what strategy can be implemented to
develop sustainable policies to reduce unemployment in Zimbabwe.Unemployment leads to
an increase in crime rate especially in the urban areas (Reserve Bank of Zimbabwe ,2005).
Creating employment opportunities for young people will improves national security by
lowering the chances of young people engaging in violent criminal activity. The government
of Zimbabwe should be able to influence the economy by implementing effective
macroeconomic and political policies to reverse the burden of unemployment.

1.3 Research objectives

 The main objective of the study is to investigate the impact of unemployment on

economic growth in Zimbabwe. This broad objective is explored through the
following sub-objectives:
 To examine the impact of unemployment on economic growth
 To analyze literature on the social effects of unemployment in Zimbabwe
 To assess the extent to which the standards of living of people in Zimbabwe have
been affected by unemployment
  To suggest some important policy about unemployment and economic growth

1.4 Research Questions

 What have been the impacts of unemployment crisis?

 What is the relatioship between unemployment and economic growth?

1.5 Hypothesis

To achieve the stated objectives the following hypothesis will be tested;

 H0: Unemployment has a negative relationship with economic growth.

 H1: Unemployment has a non-negative relationship with economic growth.

1.6 Significance of study

The research seeks insight into the major issue of unemployment crisis affecting and
negatively impacting the economic situation of Zimbabwe.It looks at the relationship of
unemployment and economic growth hence essentially the impacts unemployment has on
economic growth.This study is relevant in Zimbabwe because the economy is facing high
unemployment rate and other adverse economic conditions such as high inflation levels that
affect the national output hence economic growth of Zimbabwe.The research is intended to
benefit the student,the central government and the urban citizen.A critical analysis of how
unemployment is related to output is imperative.The study will propose solutions to reduce
unemployment in Zimbabwe.

Literature Review
2.0 Introduction

This chapter reviews theoretical and empirical studies on unemployment.This chapter has 3
sections.The last section concludes the chapter.

It is necessary and imperative to review some earlier work of this study or subject to gain
adequate theoretical and empirical background to assess the relevance and contributions of
this research study.This study attempts to ascertain the relationship between unemployment
and economic growth making use of analytical and statistical research tools.

2.1.1. Theoretical Literature

Theories of unemployment have been explored by different scholars and schools of thought
from different disciplines.Therefore there exists theoretical debate on the causes , costs and
solutions to unemployment.

THE THEORY OF EFFECTIVE DEMAND

As advocated by John Maynard Keynes the theory on income and employment was projected
into new thinking by the publication of General Theory of Employment , Interest and Money
(1936). Furthermore Keynesians have stressed the relationship between income ,output and
expenditure. Keynes states that the relationship between output and employment can be
expressed as the following equation ;

Y=O=D, where Y is the national income ,O is the value of the national output and D is the
national expenditure. The equation reflects that effective demand is equal to income and
also equal to output since consumers can either spend or save their income . Keynesians
emphasize the cyclical nature of unemployment and the possible government intervention
during economic recession.Keynesians believe that economic instability emanates from the
deviations between savings and investments.If savings rise there will be a fall in demand with
a prospect of increased future demand and if capital formation(investment) rises also by the
same amount the economy will continue to operate at equilibrium level.However if capital
formation does not rise then the demand for labour will fall assuming wages do not fall
therefore unemployment will result because some workers will become unemployed and
experience a fall in income. This result further reduces consumer demand.Unemployment is
an involuntary phenomenon Keynes(1936).

If future expectations are met by demand ,investments and employment will rise until
equilibrium level is attained where aggregate demand equals aggregate supply ,the point of
effective demand. Other Keynesians believe that an unexpected rise in the price level will
reduce real wages and increase demand for labour thus the rate of unemployment will
decline which can be likened to Phillips curve which s that there is a trade off between the
rate of unemployment and inflation.

The theory of effective demand is applicable in Zimbabwe as the issue of an increase in

demand induces an increase in employment thus reducing the rate of unemployment.
Keynesian theory supposes that a fall in investment and an increase in savings will have a
dampening effect on the economy thus this applies to Zimbabwe which is stuck at
disequilibrium with productive resources lying idle .The government can intervene by
applying expansionary fiscal policy that is an increase in government expenditure and a
reduction in taxation will stimulate private demand therefore reduce unemployment in
Zimbabwe.
SEARCH THEORY OF UNEMPLOYMENT

According to Bharat trehan the search theory of unemployment assumes workers have
different skills and jobs have different skill requirements .Neither firms nor workers have
asymmetry of information to the options available to them therefore they must engage in
search.It seeks to understand unemployment in the context of a model in which the
optimizing behavior of workers and firms gives rise to an equilibrium rate of unemployment.
Workers are assumed to search only when they are unemployed and they face an uncertain
environment.The wage at which the worker is indifferent between continuing the search and
accepting the current job is called the reservation wage.The worker accepts all job offers
above this wage and rejects all offers below it.The target nominal wage depends upon the
price level , productivity and employment (Mankiw and Reis,2001).Under the Mankiw-Reis
assumption firms are free to change prices every period. As argued by Mankiw and Reis
positive productivity shocks tend to lower unemployment in the short run that the
reservation wage tends to adjust slowly to changes in productivity.Lower search frictions
should lead to lower unemployment.

The theory of search unemployment is applicable in Zimbabwe since there is high rate of
unemployment and the economical environment is uncertain.

THE SOLOW-SWAN THEORY

The Neoclassical growth theory Solow-Swan model where gross domestic product is
explained by population increase , technical progress and investment where there is full
employment and aggregate production exhibiting constant returns to scale. Solow et
al(2002) combined the supply and demand sides of the economy to generate economic
growth.Thus economic growth can be understood from the supply side point of view.
However based on Solow-Swan model ,Aghion and Howiit(1997) argued that if there is no
technical progress then the effects of diminishing returns to capital would eventually lead to
economic growth ceasing.Trpkova and Tashevska (2011) studied the endogenous growth
models placing emphasis on human capital and innovation ability to bring growth into the
economy.

2.1.2. Empirical Review

Several studies have been conducted in an attempt to analyze the relationship between
unemployment and economic growth.Teboho(2013) investigated the impact of
unemployment on duration of work and the change in productivity (Holmes and Silverstone ,
2006). The theoretical ground of the relations Okun investigated is based on the fact that an
increased workforce must produce more goods and services. Arthur Okun found that the
unemployment rate declined in the years when the real growth rate was high , whereas the
unemployment rate increased in the periods when the real growth rate remained low.

Makun and Azu( 2015) assessed the relationship between unemployment and ecnational
income in South Africa.The data used was time series data from 1980 to 2011 using
Augmented Docket Fuller Stationary test and Granger causality test was also applied.The

study found that there exists no causality relationship between unemployment and
economic growth.Teboho's test encouraged policies of economic growth that encourage
mitigation of unemployment.
Kreishan (2011) ascertained the relationship between economic growth and output in Jordan
using 1970 to 2008 data.The empirical test showed that Okun's law had not been confirmed
in Jordan.Thus the problem of unemployment in Jordan can not be explained by the lack of
economic growth in Jordan.

Okun's law in his study of the US economy empirically proved the inverse relationship
between unemployment rate and potential output ,depending on the participation in the
workforce onomic growth for the Fiji economy over the years 1982-2012. The empirical
study identified that there is a long run relationship between economic growth and
employment.Rigs et al (2011 )assessed the reaction of output to changes in unemployment
and concluded a two way causal relationship between output and unemployment.

Hassan and Nassa(2015) identified that the rate of unemployment is inversely related to
economic growth.Balan(2014) made a conclusion that there is a statistically significant
negative impact on unemployment.

Several studies have been conducted to establish and determine the relationship between
unemployment and economic growth.Due to econometric methods used ,countries
researched ,different data and periods different results were obtained. Lee et al (2000)
mostly showed the validity of the relation between unemployment and output. Harris and
Silverstone (2001) have analyzed unemployment and output levels relation, empirical
evidence sow that there is no long run relationship between the two variables. The
somewhat different observation or finding may be due to different methods and model
setup and variables. Anton Muscatelli and Tirelli (2001) used the structures VAR model and
found a negative relationship between unemployment and economic growth.

Empirical approaches to establishing the relationship between output and unemployment

shows the evolution of opinions of different authors and lack of agreement of theories.
However the relationship between unemployment and economic growth is essentially
negative.Unemployment causes less production of output , fall in consumer spending ,more
savings ,less demand for goods and services and fall in incomes therefore declining economic
growth which in the long run may lead to an economic recession.

3.0 Methodology

The research work will be conducted employing an econometric methodology of multiple

regressions statistical and econometric tools shall be used.

Nature and Sources of Data

The data that will be used in this research are secondary data.Secondary data shall be used
because it it appropriate for this research work.

Techniques Of Data Analysis

This study will make use of regression tools of analysis in analyzing the data collected.The
estimation procedure would be that of Ordinary Least Squares method.The emphasis would
be to know whether the variables are well behaved or not.The aim is to ascertain their level
of statistical significance.

T-Test

This involves the overall significance of economic growth as the dependent variable and the
explanatory variables which are: unemployment rate , government expenditure,total
investment and inflation.

3.1. Model Specification

This is a a mathematical representation of the relationship between two or more variables

based on economic theory.Basing on the theoretical framework,we state the functional
relationship between economic growth and unemployment rate with other selected
variables such as government expenditure and mo

The model specified that :

GDPC = F(GVEXP,INFL,INVT,UNEMPL,E).........................................…(1)

GDPC =GROSS DOMESTIC PRODUCT

GVEXP=GOVERNMENT EXPENDITURE

INVT=TOTAL INVESTMENT

INFL=INFLATION

UNEMPL=UNEMPLOYMENT RATE

E= THE ERROR TERM

We then take the logarithms of the variables because the data may be non Stationary.The log
linear relationship is given by;

LNGDPC=B+BLNGVEXP+BLNINFL+BLIINVT+BLNUNEMPL+E

Natural logarithms smoothen the data as they allow for the management of high magnitudes
of figures and give the direct estimation of economic growth sensitivity to explanatory
variables.

3.1 DATA ANALYSIS

This section focuses on the empirical estimation ,presentation and economic interpretation
of the regression results carried out.The data will be converted into logarithms to reduce
variability and enable direct estimation of parameters.Maximum ad minimum statistics rule
out the possibility of outliers in the day used.
Classical linear regression requires that the residuals be normally distributed and judging by
the provability value of the Jarque-Bera all the variables residuals follows a normal
distribution therefore the correlation test can be conducted.

Auto-Correlation Test

This is used to test if the errors corresponding to different observation are

uncorrelated;tesing for the randomness testing for the randomness of the error term.The
Durbin-Waston method will be employed for this test since according to Koutsoyannis(1977)
the DW test provides estimates which have properties and are more efficient for all sample
of all size.

Econometrics Criterion (Second Order Test)

These are tests used to test to investigate whether assumptions of econometric method
employed are satisfied or not however for the purposes of this study the Autocorrelation test
will be used.

R2 and adjusted R2 test

The multiple coefficient of determination shall be carried out to the strength of independent
variables in explaining the changes in the dependent variables.Gujarati(2004) has noted the
changes in the adjusted R2 should be treated as another summary statistic.The R2 is
reported as the multiple coefficient of determination adjusted to take into account the
degree of freedom associated.

Expected Results

Variable Expected Sign

Unemployment -

Inflation +/-

Investment +
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