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Does okun’s law on cyclical unemployment apply in Kenya?

Author: 
Victor Mose
Subject Area: 
Social Sciences and Humanities
Abstract: 

The paper finds Okun’s coefficient for Kenya to be 0.12 over the period 1991-2012, instead of 0.3. This implies that to reduce unemployment rate in Kenya by 1 percent, real GDP must grow by at least 10 percent. Given the real GDP targets for the period 2012-2018, it is feasible for Kenya to achieve 4 percent unemployment rate in the 5 years but if the economy continues to consistently grow at 4.6 percent realized in 2013 it will take at least 10 years to achieve it that is by 2022. The study used cointegration and error correction model having found that the series were normal and integrated of order 1. Cointegration was confirmed by using Engle-Granger two stages process. The recovery rates of errors were found to be 55 percent and 38 percent in the short run and long run respectively. It is recommended that Kenya should target 4 percent unemployment rate by 2018, place or strengthen strategies controlling structural and seasonal unemployment, and encourage an annual 10 percent increase in consumption, investment and government spending.

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