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...