| dc.description.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. | en_US |
