The effect of government expenditure on unemployment in Somalia (1990-2023)

Abstract

This study examined the effect of government expenditure on unemployment in Somalia during 1990-2023. Secondary annual data was obtained from the World Bank and the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC). The Autoregressive Distributed Lag (ARDL) method was used to establish the short- and long-run relationship between government expenditure and unemployment, while the Granger causality test was used to determine the direction of causality among the variables. Unemployment was the dependent variable in this research, whereas government expenditure, GDP, agricultural value added, and foreign aid (ODA) were the independent variables. Augmented Dickey-Fuller test was used in testing stationarity of data, and this indicated that variables were integrated with mixed orders and therefore the use of the ARDL model is justified. Findings from the long run indicate that a rise by 1% in government spending reduces unemployment by 0.03%. Similarly, the rise by 1% in GDP reduces unemployment by 0.049%, confirming that economic growth enhances employment. Agriculture value-added was also found to have a strong negative effect, whereby a 1% rise in agricultural output lowers unemployment by 1.70%. By comparison, a rise of 1% in foreign aid (ODA) adds 0.0037% to unemployment, suggesting inefficiency in aid utilization or dependency effects. In the short run, a 1% rise in GDP reduces unemployment by 0.32% at lag zero and by 0.15% at lag one. Production in agriculture adds to unemployment by 0.41% in the initial period but reduces it by 1.50% at lag one in the short run. The Granger causality test confirms a one-way causality from public expenditure to unemployment, indicating that fiscal policy in Somalia influences labor market dynamics but may not be directly addressing unemployment reduction. The recommendations emphasize the importance of improving the efficiency of government expenditure to ensure that fiscal policy effectively contributes to job creation. Maintaining widespread GDP growth is essential for facilitating labor absorption and decreasing unemployment rates. Prioritizing the enhancement of agriculture, the largest employer, is essential, especially through strategies that increase productivity and utilize labor effectively. ODA management requires reform to ensure that aid aligns more closely with national priorities and effectively contributes to reducing unemployment.

Subject Keywords: Government expenditure; Unemployment; Somalia