EFFECT OF MACROECONOMIC VARIABLES ON UNEMPLOYMENT IN KENYA
Abstract
Unemployment is a global challenge facing both the developed and developing economies. High levels of unemployment indicate that there are deficiencies in the labour market, rising poverty levels, low standards of living and increased social evils (World Bank, 1994). This study sought to investigate the effects of selected macroeconomic variables on unemployment in Kenya. The study was guided by four objectives; to establish the effect of GDP growth on unemployment, to find out the effect of inflation on unemployment, to investigate the effect of exchange rate on unemployment and to find out how interest rates affect unemployment in Kenya. The study adopted quantitative research design, taking into consideration 35 observations, annual data for the period 1984 to 2018. Secondary data used by the study was obtained from Central Bank of Kenya, Kenya National Bureau of Statistics, International Labour Organization and the World Bank. Data analysis was conducted using STATA and E-views data analysis tools and the findings presented using figures and tables. The analysis included diagnostic tests so as to avoid estimation of spurious relationships and possible biasness. A Cointegration test using the ARDL bounds test was conducted and a long run relationship was established. The Error Correction Model was adopted to estimate the short run model and a long run OLS model was also estimated. In the short run, the study established that only GDP and previous levels of unemployment have significant effect on unemployment. In the long run, GDP growth rate, exchange rate and commercial banks’ lending rates were found to have significant influence on unemployment whereas inflation rate was found to be insignificant. The study thus recommended formulation and adoption of policies regarding GDP growth, exchange rates and commercial banks’ lending rates that would reduce unemployment levels in Kenya. Further studies were recommended by the study as the coefficient of determination was not 100% and only four macroeconomic variables were studied.
Key Words: GDP Growth, Inflation, Exchange Rate, Interest Rate, Unemployment
CITATION: Micheni, P. N., & Muturi, W. (2019). Effect of macroeconomic variables on unemployment in Kenya. The Strategic Journal of Business & Change Management, 6 (2), 1578 –1596.
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DOI: http://dx.doi.org/10.61426/sjbcm.v6i2.1205
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