The Effect Of The Minimum Wage On Employment Levels In Kenya

Abstract

This study employed a time series data spanning 1980 to 2016 to examine the effect of minimum wage on employment levels in Kenya. The main purpose of the study was to investigate the effect of minimum wage on employment levels -while using control variables, and to give policy recommendations from the findings. Diagnostic tests were carried out before regression of the model. Multicollinearity test led to dropping of some variables while the ARDL cointegration approach (Bounds Test) led to employment of a short run empirical model, the ARDL model-the relationship between minimum wage and employment levels being postulated as a short run one. The findings of the research indicated that minimum wage had a positive significant effect on employment levels in the short run-there is no long run relationship between minimum wage & employment levels in Kenya. This effect in terms of magnitude is not that weighty and therefore explicit use of minimum wage to increase employment levels may not yield much. It is therefore advisable to look at other factors that yield stronger & positive effects on increasing employment levels. The findings also show that GDP has no significant effect on employment levels in Kenya & therefore can’t be manipulated in an effort to increase labour employment in Kenya. The same can be said for inflation rates; it has no significant effect on employment levels in Kenya. This is in contrary to the Short run Phillip’s curve theory.