Effect of Fiscal Policy on Unemployment in Ethiopia

Abstract

Over the years unemployment has increased tremendously in Ethiopia. It is a social and economic problem that has eaten deep into the Ethiopian economy. The main objective of this study was to examine the short term and long-term effects of Government spending and Tax revenue on unemployment in Ethiopia. Annual time-series data for the period of 1990-2021 were employed. The ARDL approach to co integration is applied to investigate the long run and short-run determinants of unemployment.  The results of unit root suggested that both variables in the model were stationary after first difference. The results from regression analysis revealed that Government expenditure has the negative impact on Unemployment of Ethiopia. Co-integration technique was employed to establish the relationship between Fiscal policy and Unemployment. The results of co-integration test using ARDL test showed that over the period of 1990-2021 their Fiscal policy and Unemployment a negative and statistically significant short-term relationship was found. Furthermore, pairwise Granger causality test as well applied in order to find out the directional causation between Tax rate and Unemployment rate. The result indicates unidirectional causality running from unemployment to Tax and government expenditure. The concerned body should increase government spending. Therefore, the author recommends the need to increase expenditure on in productive ventures that are labor intensive which would increase employment.

Keywords: Fiscal policy, Unemployment, co-integration, Tax rate

DOI: 10.7176/JESD/12-15-03

Publication date:August 31^st 2021