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.
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