Unemployment and the informal economy in Uganda: An empirical investigation

Abstract

This paper investigates the relationship between unemployment and the informal economy in Uganda. Using annual time series data from Uganda, covering the period from 1991 to 2017, we apply the ARDL method to investigate this relationship. The results indicate a positive and statistically significant relationship between unemployment and the shadow economy in both the long- and short-run. This implies that an increase in unemployment increases the shadow economy in both the long- and short-run. These findings reveal that a high level of unemployment is detrimental to the formal economy since it spurs informal sector activities in both the short-and long-run. These results suggest that any attempt to regulate unemployment without tackling informal sector activities may not succeed unless they are addressed simultaneously. Furthermore, the results also imply that curbing informality requires implementing fiscal, economic and political reforms aimed at ensuring proper functioning of the business environment.