How to effectively tackle Kenya’s growing unemployment rate

Kenyans are wedged in the grasp of increasing food prices resulting from a mix of factors including adverse weather, increasing input costs worsened by the Ukraine war, and rising dollar pricing together with the effects of policy adjustments. The situation is made worse with the levels of unemployment during these costly times.

 According to CEIC Global Economic data, “in 2021, the unemployment rate for Kenya was 5.7 percent. The unemployment rate of Kenya increased from 3 percent in 2002 to 5.7 percent in 2021 growing at an average annual rate of 3.82percent.”

Unemployment in Kenya is accredited to the rapid growth of the population, skill mismatch, information problems in the labor market, and declining economic growth, amongst factors that impact the local and global economy such as pandemic and geopolitics.

 As economies attempt to get on track with plans for growth and stability, policymakers are concerned about employment, especially for the increasing youth population. What drives an economy to achieve a suitable level of employment and to ensure a circular flow of money in the economy?

Effective demand is the answer.

According to economist John Maynard Keynes, the volume of employment in a country depends on the level of effective demand of the people for goods and services. “Unemployment is attributed to the deficiency of effective demand”. By this, Keynes meant the total demand for goods and services in an economy at various employment levels.

 The total demand for goods and services by the people is the sum total of all demand meant for consumption and investment. The Keynesian model of effective demand consists principally of three spending streams: consumption expenditures, investment expenditures, and government expenditures, each of which is independently determined.

When consumables are continually being purchased from retail outlets, investments are taking place in the property and money markets and the government is carrying out infrastructure upgrades and other national projects simultaneously, there is a constant flow of money in the economy. Effective demand is the main determinant of the level of employment.

Employment

When effective demand increases, the volume of employment also increases and vice versa. Generally, the effective demand represents the total output, as well as the total income of the economy. In classical economics, Say’s law also known as the law of markets claims that the production of a product creates demand for another product and that supply creates its own demand.

Keynes effective demand principal repudiates Say’s law by maintaining that all the income earned by the factors of production would not be spent in buying goods and services, rather part of income is saved, and which is not automatically invested. Plus if the investment does not increase when employment increases, there will a rise in deficiency of aggregate demand.

It is such a situation of a production problem, which if it arises in the economy, it in turn creates an unemployment problem. The principle of effective demand shows that aggregate demand and aggregate supply is not always at an equilibrium position. That adjustment is made with a variation of the aggregate demand function.

 Another famous classical economist Arthur Cecil Pigou maintained that the unemployment issue can be resolved by the reduction in the money wage rate. However, according to Keynes, a wage rate cut policy will cause a reduction in effective demand. From the theoretical perspective, as the wage level decreases, the aggregate demand also decreases. Individuals struggling to pay rent or feed their families during a financial crunch would hardly be chasing a pool of products in the markets. Hence it will create the overproduction and unemployment problem again.

 Once Covid-19 was formally declared a pandemic by World Health Organization in early 2020, global money markets were impacted and securities exchanges across the world started to witness downturns. Lockdowns meant that people were spending less than before the pandemic and this impacts corporate earnings and the economy. Additionally, incomes were impacted due to sudden job cuts. At the same time, some governments were taking unprecedented steps to recharge the economies.

Consumer spending

Whilst economies such as the United States, decided to support income, providing fiscal stimulus to charge consumer spending in the wake of job losses, and Great Britain started issuing furlough compensation to temporarily discharged workforces, the same was not the case for the rest of the world. The Covid pandemic crippled most economies around the world and this impacted savings, investments, and securities exchanges. The global economy suffered a downturn, perhaps a depression leading to countries operating and producing well below their productive potential.

What makes some countries more productive than others? Let’s look at the main ingredients or the factors of production. First we need land which includes all natural resources then we need workers which is labor as well as capital, which includes machines and factories and infrastructure. A special type of capital is the workers' education, knowledge, and skills required to produce commodities.

The principle of effective demand gives importance on investment. One of the most important determinants of the effect of demand is the aggregate demand function. The aggregate supply depends upon the technical conditions of the production function, which cannot be changed during the short run. However, the aggregate demand can be altered through changes in consumption expenditures and investment expenditures.

One of the most important determinants of the effect of demand is the aggregate demand function. The aggregate demand can be altered through changes in consumption expenditures and investment expenditures. When income increases, consumption expenditures also increase, but by less than the increase in income. Thus the gap between income and consumption leads to a decline in the volume of employment or low level of income or poverty.

Investment expenditure

This gap can be fulfilled through the increase in investment expenditure. Hence, it is proved that the deficiency of effective demands creates the poverty problem in advanced capitalist countries. In industrialised economies, it is not easy to increase the volume of investment.

This is because in such countries, there is an accumulated stock of capital assets, which weakens the inducement to invest. The inadequacy of investment demand reacts in a cumulative manner on the demand for consumption and will lead to a further fall in employment, output, and income.

 Cyclical unemployment is caused by a persistent lack of demand for goods and services. It is also known as demand deficient or condition unemployment and cyclical employment is going to be the main focus as we experience a recession. The last time there was a severe rise in cyclical unemployment, was in the aftermath of the global financial crisis which essentially started in 2007 and worked its way through into the following years. The world economy during the year 2020 - 2021 was going through a recession.

The crucial concept here is that spending and income are linked. It is often said that one person spending in the shops, for example, is another person‘s income. And when spending falls in a recession then businesses in other markets and industries may suffer, and management has to choose to retrench workers, or perhaps even close.

Unemployment is a tough metric to change but a strong government can lay down policies and create employment opportunities within its own infrastructure space, leading to a ripple effect on the private sector and investments.

Tackling unemployment may not be a standalone task for policy makers but the biggest reward of correct decisions and sustainable plans. Also, it is the only way to keep the fires of economy burning bright.

Barot is a business and financial analyst. [email protected]