Working Paper: CEPR ID: DP5784
Authors: Arnab K. Basu; Nancy H. Chau; Ravi Kanbur
Abstract: This paper develops a theory of employment guarantees when labor markets are imperfect and when the credibility of government policy announcements could be in doubt. The basic feature of an EGS is that any individual who satisfies a set of specified criteria is guaranteed public employment at a given wage if they want it. Thus, the two factors that define the guarantee are the wage and the ease of access. The problem for the planner is to choose these to maximize a social welfare function. If the labour market is perfectly competitive, then the introduction of an employment guarantee scheme is bound to have efficiency costs, and can only be justified through its positive distributional consequences ? this has been the framework for most of the theoretical and empirical analysis of employment guarantee schemes. If the labor market is imperfect, however, the announcement of a credible employment guarantee scheme can improve efficiency through the introduction of contestability in the private labour market. The paper then considers the issue of credibility and solves for an incentive compatible employment guarantee scheme in a rational expectations equilibrium. It is shown that the outcome with a planner who cares only about efficiency can be less efficient than the outcome with a planner whose social welfare function also gives weight to poverty!
Keywords: credibility; employment guarantees; employment targeting; poverty aversion
JEL Codes: I38; J21; K31; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| EGS introduction (D50) | improved efficiency in labor markets with imperfect competition (J42) |
| EGS can enhance contestability in the private labor market (J48) | wage floor and guaranteed employment (J38) |
| EGS wage set appropriately (J38) | private employers raise wages (J39) |
| EGS wage raises (J38) | overall employment levels increase (J23) |
| higher EGS wages (J39) | initial increase in private employment (J23) |
| higher EGS wages (J39) | later displacement due to reservation wage effect (J29) |
| planner focused solely on efficiency (D61) | less favorable outcomes (I14) |
| planner incorporating distributional concerns (D39) | more favorable outcomes (I14) |