Drivers of Employment Elasticities in Kenya

Abstract

The relationship between output growth and employment elasticities has been of intense debate among many economists. Though there is no conflict between the two objectives, the question that arises is the rate at which employment growth responds to economic growth. The policy focus on employment in Kenya is manifested by the sheer number of employment targeted development plans and Sessional papers that have been formulated. Basically, all the policy documents developed by the government have premised employment creation on economic growth. The purpose of the study was therefore to determine the drivers of employment elasticities in Kenya. Empirical findings indicated that the first lag of employment elasticity, average wage, inflation rate, labour force participation rate, first and second lags of labour force participation rate, population density, first and second lags of foreign direct investment to be the short run drivers of employment elasticity. Empirical findings also indicated that exchange rate, foreign direct investment and population density were the long run drivers of employment elasticity in Kenya. The study recommends that policy measures to control inflation should be tightened and more efforts to attract foreign direct investment to be undertaken. The study further recommends that a stable exchange rate should be maintained. Lastly, the government should harmonize the salary scale framework to regulate the wages in the country. This could be realized through salary adjustments based on a periodical and systematic evaluation of wage parameters in the public sector and taking cognizance of the prevailing economic dynamics