Effect of Macroeconomic Policy Implementation on Unemployment in Kenya

Policymakers in the majority of the world’s economies are concerned about unemployment rates. Numerous models have been created in an effort to address the issue, but none offer a definitive answer. Policymakers in various economies struggle with finding solutions to the unemployment problem. The purpose of this study was to investigate the effects of various macroeconomic policy targets on unemployment in Kenya. More specifically, study objective was to examine the relationship between unemployment and inflation, relationship between government spending growth rate and unemployment and relationship between money supply growth rate and unemployment. The study was informed by the ever increasing unemployment rates, cost of living and the inadequate attention inform of macroeconomic policies made by the policy makers to alleviate the economy from this problem. The study was anchored on the Phillips curve theory. The study adopted an explanatory research design and employed an Auto-Regressive Distributed Lag and Error Correction Model to analyze both short run and long run results. Study sample entailed of annual secondary time series data set for a period of 30 years from 1991 to 2020, sourced from KNBS, Central Bank of Kenya, and World Bank. Findings of diagnostic test demonstrated that there was no multicollinearity among the independent variables, residuals were homoscedastic, and there was no autocorrelation among the residuals. The results of the Shapiro-Wilk normality test showed that the study’s variables were normally distributed. The co-integration test and ADF unit root test both showed that there existed a unit root and that the variables had a long-run relationship. Additionally, the model’s stability over time was confirmed by the CUSUM test. Findings of the study were: the relationship between unemployment and inflation was positive and insignificant both in the short run and in the long run; government spending growth rate had a positive significant relationship with unemployment; Money supply growth rate had a positive significant relationship with unemployment. The NAIRU was also positive and insignificant. These results suggest that it is difficult for policy makers in Kenya to employ inflation targeting policy mechanism to control and counter unemployment as suggested by Phillips curve. The study recommends that when the Kenyan economy is about to enter a recession or starts to experience sluggish economic growth, policymakers should employ an expansionary government spending policy. This type of fiscal strategy involves increasing government spending to counteract the effects of a recession. Additionally, the government should develop expansionary monetary policy strategies that target a sustainable level of inflation in the economy rather than targeting unemployment level in the economy. This is because reducing unemployment level below the natural rate of unemployment would lead to more inflationary pressures in the economy.