Fiscal Policy And Employment Elasticities In Kenya

ABSTRACT

Creation of productive and sustainable employment opportunities remains a key policy priority of most countries including Kenya. Employment creation in Kenya has been based on the premise that high economic growth should translate to more employment opportunities. Kenya has experienced varying rates of economic growth. Despite the increase in growth rates, Kenya’s employment elasticity declined from 1.28 in 1992-1996 to 0.5 and 0.38 in 2004-2008 and 2009-2016 respectively. The decline in employment elasticity meant that the growth in employment grew by less than the proportionate rate of growth in gross domestic product. Since political independence in 1963, the Kenya government has implemented various fiscal policies that focus on employment creation. Despite all these interventions, creation of adequate, productive and sustainable employment opportunities continues to be one of the greatest economic challenges in the country. The general purpose of the study was to analyze the relationship between fiscal policy and employment elasticities in Kenya. The study estimated the magnitude of employment elasticities in priority sectors in Kenya by employing a log linear regression model. Drivers of employment elasticities were also determined through an auto regressive distributed lag model. The study further analyzed the response of employment elasticities to changes in fiscal policy variables in Kenya by adopting a structural vector auto regressive model. Time series secondary data for the period 1970 to 2016 was used. Empirical findings revealed that employment elasticities within priority sectors ranged from 0.115 to 0.412. The study further found that the drivers of employment elasticity were the first lag of employment elasticity, average wage, inflation rate, labour force participation rate, population density, foreign direct investment and exchange rate. Finally, the study established that taxation, debt, recurrent expenditure and development expenditure had positive effects on employment elasticity while budget deficit had mixed effects on employment elasticity. From the foregoing, it can be concluded that the employment elasticity’s response to fiscal policies varied among the priority sectors. The study recommends that government should give more attention to service sectors as a means of enhancing employment creation. Policies pursued by the government to boost employment should also be sector specific. This could be achieved by ensuring that growth targets on employment under the Kenya Vision 2030, or any programme are employment-intensive. The study further recommends that policy measures to control inflation should be tightened and more efforts to attract foreign direct investment to be undertaken. Finally, the government ought to pursue prudent expansionary policies that will boost expenditure. This could be realized by eliminating unproductive expenditures and focus on projects and programme that are more productive capable of generating more employment opportunities.