Tax incentives for jobs: bang for the buck or wasted resources?
Abstract
Purpose
This study aims to evaluate the effectiveness of tax incentives provided by the Ethiopian government in spurring private investment and job creation, using unique administrative and survey data.
Design/methodology/approach
The study employs a dataset covering large- and medium-scale manufacturing in Ethiopia from 2012 to 2018, combined with administrative data on actual tax payments and statutory obligations to gauge the impact of tax incentives. Regression analysis using the generalized method of moments (GMM) is used to examine the relationship between tax incentives and employment, taking into account variations in production, distribution and financial costs.
Findings
The study finds that tax incentives do not significantly affect employment at conventional significance levels. The incentive elasticity of employment appears to diminish as production, distribution and financial costs increase. Consequently, the incentives provided by the government have not had a substantial impact on employment generation within the manufacturing sector.
Originality/value
This study is unique for its comprehensive analysis of tax incentives in the Ethiopian manufacturing sector using both administrative and survey data. It highlights that increasing production and financial costs can offset the employment benefits of these incentives, emphasizing the need for a more favorable business environment for private investors.
Keywords
Acknowledgements
This research benefitted from comments from Kathie Krumm and Tewodros Makonnen during the inception of the study. The authors would like to thank the participants in the research seminars at Lake Forest College and the Ministry of Labor and Skills, Ethiopia. We gratefully acknowledge the financial support from the International Growth Center (IGC), the survey data from the Ethiopian Central Statistical Agency and the administrative customs data from the Ethiopian Customs Authority. Getachew Ahmed and Anna Hoffman provided superb research assistance. All errors are our own.
Citation
Emiru, T. and Wajebo, T.W. (2024), "Tax incentives for jobs: bang for the buck or wasted resources?", International Journal of Manpower, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJM-10-2023-0626
Publisher
:Emerald Publishing Limited
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