THE EFFECT OF ETHIOPIAN FISCAL POLICY INSTRUMENTS ON COUNTRY’S UNEMPLOYMENT (1990-2019 G.C)

Abstract

The effect of fiscal policy instruments in the economy and in turn the actual response of the market is questioning. However, the role of the macroeconomic variables in the economy usually depends on the type of the country’s economy, government and market structure. The study investigates the effect of Ethiopian government expenditure and tax revenue on country’s unemployment rate under the sample period of 1990 to 2019 G.C by using secondary time series data. By using different corresponding graphs, the descriptive analysis implied that both government expenditure and tax revenue shows an increasing trend while the country’s unemployment rate shows a decreasing trend. Pre estimation test such as unit root, co-integration and multicollinearity tests are applied. Accordingly, all the variables that are under consideration become stationary at their level. The effect analysis using OLS regression resulted in the significance of all the explanatory variables in determining the dependent variable. Accordingly, both government expenditure and tax revenue have a negative significant effect on country’s unemployment rate. In the regression analysis, the estimated model includes significant positive intercept. Consequently, the case has described by relating it to natural unemployment rate; a type of unemployment which don’t offset in the long run even when the economy is at full employment. Therefore, in the strategy of controlling unemployment rate, care should be taken to the conditions and magnitude of government expenditure and tax revenue.