An Economic Analysis of Unemployment in Trinidad and Tobago

1 Introduction Unemployment is regarded as one of the most challenging economic problems facing the governments of the Caribbean. Although there are variations in the measurement of unemployment, official estimates obtained from labor force surveys indicate that, in 1995, the unemployment rate ranged from 7.8% in Antigua/Barbuda to 19.7% in Barbados (see Table 1). The data also show that unemployment is particularly high among the young cohorts of the labor force (15-25 years), and especially among young females. It is generally believed that much of this open unemployment is due to structural factors such as the nature of the educational system and its interface with the needs of the labor market (i.e., the mismatch problem), technical change and the use of capital-intensive techniques of production, permanent shifts in the demand for goods and services especially in export markets, the skill mix of the labor force and available job opportunities and, to a lesser extent, cyclical factors such as the insufficiency of aggregate local and foreign demand for goods and services. Institutional factors such as the activities of labor unions and labor market regulations have also been raised as possible contributing factors to high levels of unemployment. There has also been an increase in the number of 'discouraged workers' who are not employed and are not actively looking for work, even though they would like to work. Such high rates of 'open' and 'disguised' unemployment represent a serious waste of the human resources of the region and constitute a high cost to society (i.e., a high social cost). Although there have been several commentaries and descriptions of the unemployment there has been little systematic economic analysis of the unemployment situation in the region. Farrell (1980), for example, identifies a number of factors which are likely to affect the nature and rate of unemployment in the region. His analysis, however, fails to go to the next step of 2 applying econometric techniques to determine the relative significance and magnitude of the factors affecting unemployment in the region. Indeed, there is little econometric analysis of the determinants of unemployment in the region [see, for example, Clarke (1992), IMF (1997)]. Labor market researchers have been traditionally hampered by the lack of data on key labor market variables. However, sufficient unemployment and employment data now exist for preliminary work on the factors influencing unemployment in the region to be undertaken. This paper focuses on the …