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Higher Education and Unemployment: A cointegration and causality analysis

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European Journal of Education, Vol. 47, No. 2, 2012

Higher Education and Unemployment: a

cointegration and causality analysis of the
case of Turkey ejed_1526 299..309

Ekrem Erdem & Can Tansel Tugcu

Introduction
The importance of higher education for economics mainly stems from its ability
to create and/or accumulate human capital and increase the aggregate produc-
tivity level of the economy (Mincer, 1981; Lucas, 1988; Bogetoft et al. 2007;
Núñez & Livanos, 2010). Thus, as productivity level increases, the economy can
produce more and more efficiently (Fischer, 1993; Gregorio, 2004). These
effects of human capital have led countries to invest in higher education and the
number of higher education institutions and the student population worldwide
have risen dramatically. During the 1970s alone, the number of universities in
the world doubled (Bornstein & Davis, 2010, p. 10) and from 1970 to the
beginning of the 21st century, the number of university students worldwide
increased by more than 300% (Wolf, 2002, p. 3). According to UNESCO sta-
tistics (2009), global enrolment and graduates in higher education in 2007
totalled about 132 and 22 million respectively. However, in order to optimally
benefit from human capitals’ productivity and production enhancing effects, the
created human capital (henceforth, higher education graduates or graduates)
should be employed. But in present conditions, it is almost impossible for all
graduates to find employment because labour markets in many countries are
unable to accommodate this large group of skilled labour force. This is due to a
failure in many countries to closely link the educational system to the needs of
the labour market and to the large numbers of youth now reaching working age.
Hence, each graduate becomes a potential member of the army of jobless and
can increase the unemployment rates. In addition, the use of higher education by
governments as a tool for solving labour market problems has caused the unem-
ployed labour force to rise. The main idea behind this approach is that, if unem-
ployment rates or the tension in the labour market are too high in an economy,
they can be easily decreased by pulling idle work force back into the university
system (Plümper & Schneider, 2007, p. 633). However, Kettunen (1997) states
that probability of re-employment can be increased by the lowest levels of addi-
tional education, while the relationship turns negative at the highest levels. In
this regard, this kind of political implications which are used for populist pur-
poses may in turn increase the unemployment rates.
The aim of this study is to find out whether there is a relation between
higher education and unemployment in Turkey. The main motivation is that
there is no study which examines the higher education and unemployment nexus
in Turkey. In addition, although much research explains the relation between
higher education and economic growth in the literature (Murphy et al., 1991;
Meulemeester & Rochat, 1995; Stephan, 1997; Chatterji, 1998; Jaoul, 2002;
Sanders, 2003; Lin, 2004; Bloom et al., 2005; Narayan & Smyth, 2006; Frenkel

© 2012 Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA
02148, USA.
300 European Journal of Education, Part II

& Leck, 2006; Sari & Soytas, 2006; Kwabena et al., 2006; Richard, 2006;
Bhandari & Curs, 2007; Tiago, 2007; Khorasgani, 2008; Deniz & Dogruel,
2008), research that explores the relation between higher education and unem-
ployment is relatively rare. For instance, Schomburg (2000) assesses the
relationship between higher education and unemployment in Germany and
states that, in general, the expansion of higher education was accompanied by
a growing problem of graduate unemployment. Woodley and Brennan (2000)
consider the higher education and unemployment nexus in the UK and showed
that the rapid expansion of higher education coincided with the economic
recession of the early 1990s, producing a rise in graduate unemployment and a
decrease in permanent employment. Mora et al. (2000) analysed the higher
education and unemployment issue in Spain and revealed that the negative
face of the recent development in educational achievement of the young
population is unemployment. According to the authors, while the picture is
completely different for older graduates, unemployment is very high for
the youngest groups of higher education graduates. Moreau and Leathwood
(2006) examined the employment status of graduates across Europe and stated
that they enhanced unemployment in most European countries and that this
was not a temporary process. Plümper and Schneider (2007) investigated the
relation between unemployment and higher education in Germany by using
state level data and revealed that state governments misused higher education as
a labour market instrument against unemployment. Findings show that the
States which experience larger enrolment ratios in higher education also
have higher unemployment rates. Finally, Núñez and Livanos (2010) analysed
the effects of higher education and the field of study on the likelihood of short
and long-term unemployment across Europe (EU15) and found a different
result from existing studies. The authors state that higher education increases the
employment opportunities and decreases unemployment across Europe.
This supports the theory that, although most studies indicate negative relation-
ship between higher education and unemployment, it can be both negative
and positive.
The novelty of this research is the fact that it uses a different method from
prior studies. For instance, while most do not involve an empirical analysis
(Schomburg, 2000; Woodley & Brennan, 2000; Mora et al., 2000; Moreau &
Leathwood, 2006), others use econometric methodologies which are unable to
estimate the short and long-run relations between higher education and unem-
ployment separately (Plümper & Schneider, 2007; Núñez & Livanos, 2010).
However, both higher education and unemployment are two-dimensional phe-
nomena and especially unemployment has different causes and effects in the
short and long run (Topel, 1984). Thus, in order to find the short and long run
relations between higher education and unemployment, this study employs the
Autoregressive Distributed Lag (ARDL) approach to cointegration developed by
Pesaran et al. (2001) which is widely used by recent studies in the cointegration
literature. The advantage of this methodology over other cointegration tech-
niques is that, not being sensitive to the order of integration of the variables in
question, the variables can be cointegrated irrespective of whether they are
purely I(0), purely I(1) or mutually cointegrated. Furthermore, since the bounds
testing approach relies on a single equation estimation based on the ARDL
modelling framework, the point estimates of parameters can be interpreted as

© 2012 Blackwell Publishing Ltd.

 Ekrem Erdem & Can Tansel Tugcu 301

the long-run cointegration coefficients. In contrast, the magnitude of the param-

eter estimation of other approaches (Engle & Granger (1987); Johansen &
Juselius (1990)) cannot be interpreted because of the multivariate modelling
framework (Juselius, 1999).
The second novelty is that it tests whether or not the estimated cointegration
parameters are stable over time by using the parameter stability tests of Brown
et al. (1975). If cointegration parameters are not stable over time, implication(s)
inferred from empirical findings will not be valid.
Finally, this research is the first ‘higher education and unemployment nexus’
study which conducts a causality analysis. In this respect, a new version of the
Granger causality analysis pioneered by Dolado and Lütkepohl (1996) was
employed. Since the standard Wald test of Granger causality may result in non-
standard limiting distributions based on the cointegration properties of the vari-
ables and on nuisance parameters (Lütkepohl & Kratzig, 2004), more recent
studies have relied upon the approach of Dolado and Lütkepohl (1996) to over-
come this singularity problem.
A Brief Note about Unemployment and Higher Education in Turkey
Like for many other developing or developed countries, higher education and
its functionality are very important for Turkey. Especially after experiencing
fundamental political and economic transformation in the 1980s and leaving
inward-oriented understandings behind, this importance has gained another
meaning. The change has attracted the logic of the economy and caused it
to turn into an outward-oriented, private enterprise-driven and knowledge-
based dynamic economy. In order to meet the needs of this large restructur-
ing, higher education has undertaken a very stringent task: accumulating and
supplying necessary skilled labor. However, the implementations of this task
with the growth of the young population have created another problem. The
created labour force became far greater than the economy could accommodate
and the number of unemployed skilled labour and the general unemployment
rate have risen.
Table I shows the developments in population, unemployment and some rel-
evant information related to higher education in Turkey during the period 1970–
2007.The population increased from 36.2 to 73 million, indicating a 2.7% average
increase per year. This was followed by a rise in both total and higher education
unemployment rates. While the total unemployment rate was 6.3% in 1970, it
reached 10.3% in 2007, with a 1.7% average increase per year. Unemployment
rates with higher education had a 9.3% average increase per year and rose from
4.9% in 1991 to 12.7% in 2007.
In the same period, the number of universities, students and graduates
increased dramatically. While there were 7 universities (all public), 170,000 stu-
dents and around 23,000 graduates in 1970, in 2007 the figures were 133 uni-
versities, 2.4 million students and 409,000 graduates. This reflects approximately
34% and 45% annual average increases in students and graduates respectively.
Although the numbers of graduates are not available after 2007, in 2010, the
total number of universities and university students reached 146 (95 public and
51 private) and almost 2.5 million respectively.

© 2012 Blackwell Publishing Ltd.

302 European Journal of Education, Part II

Table I. Population, unemployment and higher education in Turkey

1970 1980 1991 2000 2007

Population (Mio) 36,2 46,1 57,0 66,4 73,0

Unemployment Rate(1) 6.3 8.1 8.2 6.5 10.3
Unemployment Rate(2) n.a. n.a. 4.9 9.6 12.7
University Students (thousands) (3) 169,7 237,3 759,0 1.508,2 2.372,1
University Graduates (thousands)(4) 22,8 31,8 87,4 234,1 409,0
Number of University(5) 7 19 30 73 133

Sources: World Bank, World Development Indicators.

OECD.Stat, Labour Force Statistics.
Turkish Statistical Institute’s Statistical Indicators 1923–2008.
(1) Total unemployment rate.
(2) Unemployment rate with higher education (not avaliable before 1991).
(3) Number of students in Turkish higher education system.
(4) Number of students graduated from higher education institutions (not avaliable after
2007).
(5) Includes both the state and the private universities.

Empirical Model and Data

In this study, the short and long-run relations between higher education and
unemployment are examined by using a log-linear function which is formulated as
follows:
ln U t = α + β ln HEt + ε t (1)
where Ut is the unemployment rate, a is the constant term, HEt is the higher
education indicator and 僐 is the error term.
The study uses annual data covering the period 1960–2007. The data for the
unemployment rate were derived from the OECD Statistical database and those
for the indicator of higher education were obtained from Statistical Indicators
1923–2008 of the Turkish Statistical Institute.
While the unemployment rate is survey based and is the sum of males and
females, the indicator of higher education is measured as the total number of
people who have completed higher education in the considered year. The reason
for choosing this proxy instead of total number of university students is that
full-time students are not included in the labour force, even though they are
looking for a job (Leibfritz et al., 1997), and there are no available data which
categorise the students as full-time or part-time for Turkey.
Econometric Methodology
To investigate the long-run relations (cointegration) among the time-series vari-
ables, several econometric approaches were developed over the last three decades.
For instance, while Engle and Granger (1987) use a two-step residual-based
procedure to test the null of no-cointegration, Johansen and Juselius (1990) use
the system-based reduced rank regression approach. But all these methods con-
centrate on the cases in which the underlying variables are integrated in order one.
This inevitably involves a certain degree of pre-testing, thus introducing a further
degree of uncertainty into the analysis of level relationships.
Pesaran et al. (2001) developed a novel cointegration method which is
known as the Autoregressive Distributed Lag (ARDL) approach (i.e. the bounds
testing approach) to cointegration. They pointed out its advantages over other

© 2012 Blackwell Publishing Ltd.

 Ekrem Erdem & Can Tansel Tugcu 303

cointegration tests (e.g. Engle & Granger (1987), Johansen & Juselius (1990)).
While other cointegration methods concentrate on the cases where the variables
are integrated in order one, the bounds testing approach is applicable irrespective
of whether the underlying variables are purely I(0), purely I(1) or mutually coin-
tegrated. Finally, Pesaran and Shin (1999) indicate that the ARDL approach
performs better in a small sample and yields consistent estimates of the long-run
parameters asymptotically distributed as standard normal irrespective of whether
the underlying variables are I(0) or I(1).
The bounds testing approach requires estimating the following ARDL repre-
sentation of equation (1):
p p
Δ ln U t = a0 + ∑ a1i Δ ln U t − i + ∑ a2i Δ ln HEt − i + θ1 ln U t −1 + θ 2 ln HEt −1 + ut (2)
i =1 i =0

where D is the difference operator, p is the lag length, and u is the serially
uncorrelated error term.The ARDL procedure involves two stages. In the first, the
null hypothesis of no-cointegration relationship in the long-run among the vari-
ables defined as H0:q1 = q2 = 0 is tested against H1:q1 ⫽ 0,q2 ⫽ 0䊐. Testing the
cointegration relationship is based on the F-statistic. Since the asymptotic distri-
bution of this F-statistic is non-standard irrespective of whether the variables are
I(0) or I(1), Pesaran et al. (2001) therefore tabulated two sets of critical values. One
assumes that all variables are I(0) and the other that all variables are I(1). This
provides a bound covering all possible classifications of the variables. If the calcu-
lated F-statistic lies above the upper level of the bound, the H0 is rejected,
supporting cointegration relationship in the long-run. If the calculated F-statistic
lies below the lower level of the bound, the H0 cannot be rejected, indicating lack
of cointegration. If the calculated F-statistic falls between the bounds, then the test
becomes inconclusive and the error-correction term in this case is used to deter-
mine the existence of cointegration. If a negative and significant error-correction
term is obtained, the variables are said to be cointegrated.
Once a long-term relationship is established, the second stage of the ARDL
procedure is to estimate the error-correction model (ECM) from equation (2).The
ECM can be written as follows:
p p
Δ ln U t = α + ∑ ω k Δ ln U t − i + ∑ λ k Δ ln HEt − i + ϖ ECt −1 + u t
i =1 i =0

where v is the error correction parameter and EC is the residual obtained from
equation (2).
Since cointegration among the variables does not ensure the stability of the
parameters, one should provide that the cointegration parameters are stable over
the time. In this regard, cumulative sum (CUSUM) and cumulative sum of squares
(CUSUMSQ) tests for parameter stability developed by Brown et al. (1975) are
widely utilized with the ARDL modeling framework. These tests are based on the
recursive regression residuals. The CUSUM and CUSUMSQ statistics are
updated recursively and plotted against the break points of the model. If the plot
of these statistics falls inside the critical bounds, one decides that the coefficients
from the estimated model are stable over the time.
The existence of a cointegration relationship among the variables indicates that
causality should exist in at least one direction (Engle & Granger, 1987). To test

© 2012 Blackwell Publishing Ltd.

304 European Journal of Education, Part II

causality relationship among the variables, modified Wald (MWALD) test devel-
oped by Dolado and Lütkepohl (1996) (henceforth, DL) was used. The main
advantage of this causality test is the fact that overcomes the singularity problem
of classical Granger causality test. Because, the Granger causality test requires
carrying out zero restrictions on VAR coefficients using familiar c2 or F-test based
on the Wald principle. But the presence of I(1) variables in the VAR model may
cause non-standard asymptotic distribution of these statistics. Particularly, Wald
test for Granger causality may result in non-standard limiting distributions based
on the cointegration properties of the system and possibly on nuisance parameters.
These non-standard asymptotic properties of the test of the zero restriction on
cointegrated VAR processes are due to the singularity of the asymptotic distribu-
tions of the estimators (Lütkepohl and Kratzig, 2004). The DL causality test
overcomes this problem by adding an additional lag to the true order of the VAR
model. The testing procedure involves two steps. First, a VAR(k) is determined by a
model selection criterion such as Akaike Information Criterion (AIC). Second, a
VAR(p+1) is estimated and then the standard Wald test is applied on the first p lags.
Dolado and Lütkepohl (1996) called this new statistics as Modified Wald
(MWALD) which is asymptotically distributed as chi-square.
Empirical Findings
Although the ARDL framework does not require pre-testing for the order of
integration, Augmented Dickey-Fuller (ADF), Elliot et al. (ERS) and Ng-Perron
(NP) tests were used to determine the order of integration of the variables in the
model. The results in Table II show that there is a mixture of I(0) and I(1) of
underlying variables and therefore support that the ARDL testing could be used
instead of other cointegration methods.

Table II. Results for unit root tests

Level Variables Test

ADF ERS NP(MZa)

Constant lnU -2.565 2.819** -9.414**

lnHE -0.915 334.462 1.809
Constant + Trend lnU -2.473 8.317 -11.291
lnHE -3.903** 7.854 -12.060
First-Difference

Constant lnU -6.834*** 1.221*** -19.407***

lnHE -4.430*** 1.392*** -17.543***
Constant + Trend lnU -6.817*** 5.386** -16.224*
lnHE -4.417*** 4.996** -17.545**

*** significant at 1% level; ** significant at 5% level; * significant at 10% level.

The next step in the bounds testing approach to cointegration is to carry out the
F-test on selected ARDL model including appropriate lag lengths. In this regard,
as taking Turkish higher education and employment system into consideration,
maximum 10 lags were imposed on the level of variables and then employed
Akaike Information Criterion (AIC) to select the optimal number of lags. The
F-statistic and error correction parameter for cointegration analysis based on the

© 2012 Blackwell Publishing Ltd.

 Ekrem Erdem & Can Tansel Tugcu 305

selected ARDL model are reported in Panel A at Table III. Results show that both
F-statistic and error correction parameter indicate cointegration relationship
between higher education and unemployment in the long-run. The lag order at
which AIC was minimized is 9.
The long-run cointegration vector is presented in Panel B in Table III. It is
clear that lnHE is statistically significant and positive. According to this result, 1%
increase in higher education graduates rises the unemployment rate by 0.11% in
the long-run. This finding implies that the population of higher education gradu-
ates is more than the Turkish economy could accommodate.

Table III. Results for cointegration analysis

Dependent variable

lnU

Panel A: Cointegration Tests

F-stat 8.80
Error Correction Parameter -0.41 [0.002]
Panel B: Long-run Parameters

Constant 0.77 [0.221]

lnHE 0.11 [0.040]
Panel C: Short-run Parameters

Constant 0.31 [0.298]

lnHE 0.04 [0.035]
Panel D: Diagnostic Checking

Adjusted-R2 0.48
Serial Correlationa 0.011 [0.916]
Heteroscedasticityb 1.776 [0.184]
Functional Formc 0.075 [0.784]
Panel E: Stability Tests

CUSUM S
CUSUMQ US

The critical values for F-statistic are (4.04–4.78) for 10 percent,

(4.95–5.73) for 5 percent, and (6.84–7.84) for 1 percent level of
significance. The critical values are obtained from Table CI(iii) Case III
in Pesaran et al. (2001).
a: The Breusch–Godfrey LM test statistic for no serial correlation.
b: The White’s test statistic for homoscedasticity.
c: The Ramsey’s Reset test statistic for regression specification error.
Numbers in brackets are p-values.
S (US) refers to stable (unstable) model.

The short-run relation between higher education and unemployment is as shown

in Panel C at Table III. Even though the coefficient of lnHE is relatively small, it
is still statistically significant and has a positive effect on the unemployment rate.
If the number of higher education graduates increase 1% in the short-run, the
unemployment rate rises by 0.04%.
Combining the findings from the long and the short-run parameter estimates
implies a policy that Turkish governments should not invest more in higher

© 2012 Blackwell Publishing Ltd.

306 European Journal of Education, Part II

education than the economy needs. Instead, they should implement policies which
encourage or promote fixed capital investments and creating job opportunities in
order to optimally benefit from the existing graduates. Only in this way higher
education could fulfill the task which has been undertaken and may accelerate the
evolution of the Turkish economy.
Since the ARDL method uses the OLS (Ordinary Least Squares) estimator in
order to estimate the cointegration vector, one should ensure that the assumptions
of the OLS estimator are not violated. In this context, the results for diagnostic
checking were illustrated in Panel D at Table III. It is clearly seen that the
estimated ARDL models ensure the assumptions of no-serial correlation,
homoscedasticity, and no-functional misspecification.
The cointegration among the variables does not ensure the stability of the
parameters. Parameter tests are important, since unstable parameters can result in
model misspecification that may cause a bias in the estimation (Narayan and
Smith, 2006).Thus, the stability of the long-run coefficients was tested by applying
CUSUM and CUSUMSQ tests.The stability test results which are summarized in
Panel E in Table III show that the estimated ARDL model provides stable param-
eters according to at least by one of the stability tests, implying that the absence of
parameter instability of the long-run coefficients.
Finally, in order to determine the causal relationships among the variables in
question, DL causality analysis was employed and the results were reported in
Table IV. The causality analysis indicates that there is bi-directional causality
between higher education and unemployment. This result supports the fact that
unemployment is a cause and a result of higher education. It is a result because
higher education system creates more labor force than needed, and it is a cause
because higher education is promoted for the sake of hiding the problems in labor
market of the economy.

Table IV. Results for DL causality test

Hypothesis (p + 1) MWALD Causal

HE does not cause U 4 2.79 [0.039] Yes

U does not cause HE 4 5.45 [0.001] Yes

The AIC was used to determine the appropriate lag orders.

Numbers in brackets are p-values.

Conclusion
In this study, the cointegration and causality between higher education and unem-
ployment in Turkey is investigated by using annual data covering the period
1960–2007. The study uses the ARDL approach to cointegration as a device in
searching for common stochastic trends between variables, while causal relations
are investigated by using the Dolado and Lütkepohl’s causality test.
The cointegration analysis indicates that there exists a statistically significant
common stochastic path between higher education and unemployment. According
to the results, higher education graduates are one of the factors which rise the
unemployment rate in Turkey in the long-run. Nevertheless, although the impact is
relatively small, error correction estimates show that higher education also increases
the unemployment rate in Turkey in the short-run, too.These results are consistent

© 2012 Blackwell Publishing Ltd.

 Ekrem Erdem & Can Tansel Tugcu 307

with Schomburg (2000), Woodley and Brennan (2000), Mora et al. (2000) and
Moreau and Leathwood (2006), but contrast with Núñez and Livanos (2010). In
addition, the causality analysis indicates that there is a bi-directional causality
between higher education and unemployment inTurkish economy. According to the
causality test results, it seems that unemployment is a cause and a result of higher
education in Turkey, supporting Plümper and Schneider (2007)’s theory.
Combining the findings from cointegration, error correction and causality
estimates for higher education and unemployment nexus implies a policy that
Turkish governments should not invest in higher education more than the economy
could accommodate. Instead, policies which are designed for promoting the fixed
capital investments and increasing job opportunities could be more useful and
efficient than that only increases the population in higher education system. Finally,
we can conclude that unemployment in Turkey increases the demand for using
higher education as a tool for the sake of solving the problems of the labor market in
the short-run which in turn creates a greater unemployment problem in the
long-run.

Ekrem Erdem, Faculty of Economics and Administrative Sciences, Erciyes University,

Kayseri, Turkey, ekremerdem@erciyes.edu.tr
Can Tansel Tugcu, Faculty of Economics and Administrative Sciences, Nevsehir
University, Nevsehir, Turkey, cttugcu@nevsehir.edu.tr
Acknowledgement
We would like to thank to Saban Nazlioglu who helped with the methodology of
this article.
NOTE
Plots of CUSUM and CUSUMQ tests are available upon request from the
authors.
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