The Limitations of Using Fiscal Incentives for Employment Promotion

The role of fiscal incentives for employment promotion is only one aspect of the broader role of fiscal policy in this area. Fiscal policy can affect employment through three distinct mechanisms. The first is through its effect upon macroeconomic aggregates. Fiscal policy can stimulate aggregate demand, and therefore employment, in the short run provided there is some utilisable excess capacity. It can also promote higher rates of investment thus raising the level of capacity in the economy, and therefore employment, in the longer run. The second mechanism relates to Government expenditure decisions which can directly influence employment generation either by altering the composition of expenditure in favour of categories which are inherently more labour-using, or by choosing more labour-intensive techniques within given types of expenditure where such choices exist. Finally, fiscal policy can affect the level of employment either by altering relative output prices to induce consumers to switch to more labour-intensive products or by altering relative factor prices to induce producers to shift to more labour-using techniques. This is the mechanism of fiscal incentives with which this paper is concerned. The first two mechanisms are extremely important in terms of their quantitative impact on the employment situation. They may often be more important than fiscal incentives. However, they are outside the scope of this paper and are not dealt with further.