Unemployment and Economic Development in Kenya

CHAPTER 2 METHODOLOGY
2.1 Introduction
Theory have put forward several prepositions on how economic development has lead to reduction of unemployment rates through both private and public investment according to the Solow’s model and endogenous theories of economic development.
Empirically, the studies done on development have raised mixed up conclusions as some show that economic development has lead to capitalization hence capital replacing the labour and thus further unemployment.
This chapter reviews both the theoretical and empirical literature on economic development and unemployment and in particular as it applies to the Kenyan situation.
2.2 Theoretical literature
Economic development which encompasses both quantative and qualitative changes in the economy evident through economic growth and distribution of welfare within an economy has a very important role to play in the economy and especially in labour economics .the level of investment which lead to economic hence creation of jobs and reduction in labour market crises of unemployment.
Several models have been developed to understand the relationship between increased levels of employment and economic development which are as follows: a) Solow model b) Romer model c) o-ring theory

2.1 The Solow
This model its basis on the believe that growth of output and hence economic development is determined by increase in labour quantity and quality, increase in capital and improvements in technology. Technology is assumed to be constant across nations and thus variations in economic growth and economic development are due to stock of capital. Thus in less developed countries the low level of economic growth and development are due to low capital stock and also as a contribution of the governments by impending foreign capital flow.
According to this model there is substitutability of factors of production and hence diminishing returns to the factors, there is also perfect mobility of factors of production therefore accumulation of capital implies development. Emphasizes on accumulation of domestic savings to invest in capital are important in the model.
Development is equated to GDP and the distribution of GDP among the population is considered unimportant .this is basically given by the equation 1;
Y=ka(AL) 1-a
Where:
Y is gross domestic product
K is stock of capital
L is labour
A is productivity
This model maintains the assumption of perfect competition, perfect information perfect enforcement, complete markets and complete contracts.

2.2 .3 Romer model
The model assumes constant returns to scale at firm level; increasing returns at the economy level and existence of both monopoly and perfect market segments in the economy.
The model identifies technological change as important for economic growth and development and technological change is endogenous.
The rate of technological advancement and thus economic growth depends on the size of the market and stock of human capital. it proposes four basic inputs , capital which is measured in un its of consumption goods ,labour measured as counts of people , human capital measured as accumulative effects of formal education and on job training ,and an index of technology measured as account of number of designs .
The economy is divided into two sectors as follows:
a) Research sector
b) The manufacturing sector
Human capital is given as HY+HA<H
Where:
HA is total human capital employed in research sector.
HY is total human capital employed in manufacturing sector.
The economic growth and thus economic development is given by the equation; g= dH-^P/ d^+1

Where: g is common growth rate
^is constant that depends on the technology from this model the lager the stock of human capital the faster the growth and thus economic development.
2.2.3O-ring theory
Assumes strong complementary among inputs into production, perfect labour markets and sufficient imperfect of workers for each other. low levels of economic development in less developed countries is due to low investment in human capital and thus unemployment and under employment are rampant in developing countries and more so in the rural areas .
The general equation is given as: d2y/ dqD (Tqj) =nBka
Where:
Y is the level of out put
K is capital q is the level of skills required to accomplish each of the n tasks and its between 0 and 1
B is the multiplier term that depends on the characteristics of firm and increases with the increase in the number of tasks.