Fiscal Policy and Unemployment in Ethiopia: Evidence From Ardle Model

Abstract

One of the primary goals of macroeconomic and fiscal policy in the Ethiopia, as in many other developed and developing countries is to reduce unemployment. The study investigates the impact of fiscal policy on unemployment in Ethiopia from 1990 to 2022. In the analysis, the cointegration test, the ARDL Model were used. The variables studied include real gross domestic product (RGDP), government spending, tax income, trade openness, population growth, and the unemployment rate. The stationarity test was performed, and the findings showed that, with the exception of population increase, all variables were stationary at first difference. The cointegration test result demonstrated that the variables under examination have a long-term relationship. Furthermore, ECM results revealed that government spending has a negative influence on unemployment while tax income has a beneficial impact. Finally, the Granger causality results revealed a one-way relationship between unemployment and government spending, with causality moving from government spending to unemployment. Using this method, the researcher discovers evidence of a long-run relationship between the unemployment rate and variables such as government spending and tax income. The study recommends, the government restructure its spending patterns by directing more funds toward productive expenditures and utilizing its potential for revenue generation by diversifying Ethiopia's revenue stream.