Analyzing the long-term relationship between unemployment and economic growth in Saudi Arabia: A VECM approach

This study examines the relationship between unemployment and economic growth in Saudi Arabia (1991–2023), incorporating control variables such as the current account balance, school enrollment, government expenditure, inflation, oil rents, and the manufacturing and services sectors. Using a Vector Error Correction Model (VECM), we analyze both long- and short-term dynamics. Results indicate a significant long-term negative association between unemployment and GDP, current account balance, education, government spending, inflation, oil rents, and services sector performance, aligning with Okun’s Law. In contrast, manufacturing exhibits a positive relationship with unemployment, suggesting sector-specific labor market challenges. Short-term analysis reveals that roughly 20% of disequilibrium corrects annually, with GDP and current account balance driving immediate unemployment reductions. The findings underscore the need for policies that stimulate sustainable growth, enhance education, and prioritize job creation, particularly in the services sector.