The Impact of Youth Unemployment on GDP Growth in Sri Lanka

Abstract

This study examines the impact of youth unemployment on GDP growth in Sri Lanka using annual time series data from 1990 to 2023. Recognizing youth unemployment as a persistent constraint on Sri Lanka’s economic potential, the analysis incorporates inflation, interest rates, and gross fixed capital formation as additional macroeconomic variables influencing growth. Unit root tests reveal that GDP growth, youth unemployment, interest rates, and capital formation are integrated of order one, while inflation is stationary at level, justifying the use of the ARDL model to estimate both short-run and long-run relationships. The ARDL bounds test confirms the existence of a stable long-run cointegration among the variables. Long-run results show that youth unemployment significantly and negatively affects GDP growth, emphasizing that high youth unemployment undermines economic expansion in Sri Lanka. Inflation also has a significant negative effect on growth, while gross fixed capital formation contributes positively, highlighting the critical role of investment in supporting long-term economic development. Interest rates exhibit a negative but statistically insignificant impact over the long run. In the short-run dynamics, reductions in youth unemployment significantly increase GDP growth, while increased capital formation provides a strong positive contribution to economic activity. The error correction term is negative and significant, indicating that approximately 84% of deviations from the long-run equilibrium are corrected within a year, confirming a rapid adjustment toward stability following shocks. These findings underscore that targeted policies to reduce youth unemployment are essential for promoting sustainable economic growth in Sri Lanka. Additionally, managing inflation and fostering an investment-friendly environment are critical to maintaining macroeconomic stability and supporting youth employment. The study provides evidence-based insights for policymakers to address youth unemployment effectively, contributing to the broader dialogue on labor market reforms and inclusive growth in Sri Lanka.