Unleashing the power of economic forces: exploring the relationship between macroeconomic factors and unemployment in Norway and uk using ARDL approach

Abstract

The problem of unemployment is a global issue and it is vital to carry out detailed examination of this issue. We need to identify and analyze several factors affecting unemployment in a country. The aim of this research is to determine how various macroeconomic factors and unemployment interact with each other. This includes trade, oil consumption, domestic credit to private sector, gross capital formation and inflation in context of Norway and UK. The basic purpose of this study is to analyze whether the effect of these macroeconomic factors on unemployment is significant or insignificant. In order to conduct this study, period of 1979-2021 is used. In order To find out the impact of independent variables on unemployment, this study executes the KPSS and NG- Perron test to determine whether a variable is stationary or not, and then apply ARDL in order to test the long run and short run Co-integration between unemployment and independent variables. According to our findings, there is a significant long run Cointegration present between Unemployment and trade, domestic bank lending to the private sector, gross capital formation, Oil consumption and show insignificant relation with inflation in case of Norway. If we talk about UK all these factor are significantly Co-integrated with unemployment in long run. Diagnostic tests are also considered in this study which include Serial correlation, Heteroscedasticity, normality, functional form, CUSUM and CUSUM square. The results provide a non-significant probability value higher than 0.1 which implies that the error term has no serial correlation issue and  variance of error is homoscedastic along with well-defined functional forms and errors exhibit characteristics of a normal distribution. CUSUM and CUSUM SQUARE for both countries show stability of mean of error term and variance of error term. Key words; - Unemployment, Macroeconomics factor, unemployment, UK and Norway, ARDL bounce test