EFFECT OF SELECTED MACROECONOMIC DETERMINANTS ON UNEMPLOYMENT IN KENYA

Abstract

Kenya has been struggling with high unemployment rates which have remained constant with more fiscal expenditure and government investments, which have mainly been funded through the external borrowing. In the past three decades, external public debt has increased tremendously but its influence on the labour market performance especially on unemployment has been dubious. This paper explores how the external debt, capital outflow and inflation impact on unemployment in Kenya between 1994 and 2024 with special attention to moderating interest rates. This was based on the major macroeconomic theories such as the Keynesian theory of public expenditure who propose that the expansion of government spending to spur employment, the Crowding out theory who warns that the growth of government borrowing would hurt the investment in the private sector, the Debt overhang theory which postulates that a high level of external debt would put off investment in the sector as a result of future taxation and the Portfolio management theory who explains the mobility of money and the reaction of investors to macroeconomic risks like inflation and volatility of interest rates. In the case of the time series research design, secondary data was obtained using Kenya National Bureau of Statistics, Central Bank of Kenya, World Bank, and Macro trends. EViews version 16 was used to perform econometric analysis by performing the unit root testing, ARDL bounds testing, and estimating the long-run coefficients. When augmented in first difference, stationarity was found to be true with the Augmented Dickey-Fuller test. The ARDL bounds test demonstrated that there is a long-run relationship (F-statistic = 5.87 > upper bound critical value at 1% = 5.06). The estimates of the long-run coefficients indicated that an increase in the external public debt by 1% had a significant positive effect on unemployment (β = 0.2946, p = 0.05), meaning that a 1 percent evolution in the external debt increases unemployment by 0.2946. There was also a strong positive effect by capital outflow (β = 0.0003, p = 0.000), and a moderate negative impact of inflation (β = -0.1139, p = 0.000). The relationship between capital outflow and unemployment was also statistically significant with the moderating effect of interest rates of -0.0012, ( p = 0.05) indicating that interest rate has a dampening effect. The importance of this study is that it provides empirical evidence to establish the existence of a relationship between fiscal borrowing and macroeconomic volatility with labor market performance in Kenya. The results provide the policymakers with essential information about the significance of sound management of existence in debt, control of capital mobility, the target of inflation and policies of interest rates to reduce unemployment and promote sustainable growth.