Fiscal incentives and jobs: Bang for the buck or wasted resources?

This study used a novel administrative and survey data to quantify the tax incentives given by the government of Ethiopia and examine their effect on employment growth. The analyses showed that firms that hire more workers operate in an environment with significant costs of raw material, professional services, and financial costs. These costs have hindered productivity growth and expansion of employment opportunities. While the incentive variable and its interaction with costs are mostly statistically insignificant in the empirical estimations, they have the expected signs. The elasticity of employment with respect to incentives is positive and decreases with increasing costs. These results indicate that the effect of the incentives may have been mitigated by significant production, distribution, and financial costs. The incentives need to be complemented with other measures that make the business environment more conducive for private investment.