Determinants of Unemployment in Namibia

This study investigates the causes of unemployment in Namibia for the period 1971 to 2007. The analysis is carried out through an extensive review of the relevant literature, microeconomic and macroeconomic models of unemployment. The unemployment model (with macroeconomic variables) is estimated using the Engle-Granger two-step econometric procedure. The results revealed that there is a negative relationship between unemployment and inflation in Namibia. Unemployment responds positively if actual output is below potential output, and if wages increase. An increase in investment causes unemployment to decrease significantly. The results provide evidence that the Phillips curve holds for Namibia and unemployment can be reduced by increasing aggregate demand. It is important to increase output up to the country’s potential, and there is a need for wage flexibility (workers need to reduce their wage demands) in order to decrease unemployment in Namibia. Increasing investment will reduce unemployment significantly.