Consequences for Labour Markets

A cash grant system could help to reorient citizens towards gainful private employment in at least two ways. First, it should be accompanied by public sector employment reform that would make government hiring a more remote prospect. Citizens would hence not be incentivised to wait for easy, often unrewarding government jobs in order to secure their share of the country’s wealth, but would be free to pursue their own preferences, including on the private labour market. Citizens would also be more likely to seek education relevant to the private sector, helping them to contribute to the creation of economic value. Fewer human resources would be ‘parked’ in unproductive, surplus government positions, and the public sector itself could reorient its staffing and hr policies away from politically determined patronage and towards needs- based, productivity-oriented strategies.

This effect would be less powerful in poorer Arab countries where public sector employment is already a fairly unlikely scenario for most new labour market entrants (although their preferences and educational behaviour indicate a continued orientation towards the public sector). There is, however, a second potential design feature through which giving cash grants could provide a universally strong incentive for private employment: excluding incumbent public servants above certain income levels—who, after all, already receive an implicit subsidy as they typically earn more than equivalent private sector employees—from receiving the grants.[1] In this way, the effective earnings gap between private and public employment would be narrowed or closed—without any net loss to existing government employees.

This citizens’ income would then function in a manner somewhat analogous to an unconditional wage subsidy for private employment:[2] citizens could achieve acceptable total income levels even if they held less-well-paid private jobs, as their citizen’s income would top up their wages without penalty.

An unconditional cash grant would have an ‘income effect’ that would potentially disincentivise work effort on the margin. Any negative effect however would be less strong than under conventional means-tested support mechanisms: unconditional grants would avoid the substitution (or ‘tax’) effects of unemployment assistance or insurance and other forms of conditional income support, where benefits are lost as work is found and/or wages increase (Wider- quist and Lewis, 2009).[3]

A cash grant scheme could help politicallyjustify the gradual re-engineering of the Arab world’s bloated public sectors. It is quite likely that future generations would prefer a safe cash grant over the highly uncertain prospect of gaining a surplus government job at some point. This quid pro quo would allow governments to recruit on the basis of administrative needs rather than imperatives of patronage. The resulting improvements in administrative efficiency could contribute significantly to citizens’ quality of life, and to the local business climate.

  • [1] Public sector salary schemes could be adjusted to make sure that the lower earners in thegovernment sector would not be disadvantaged vis-a-vis private employees.
  • [2] Not strictly analogous, as wage subsidies are only paid when an individual is in paidemployment.
  • [3] Targeted subsidies for low-wage workers (like the Earned Income Tax Credit in the us) wouldhave similar, if weaker, disincentive effects relative to the citizen’s income, reducing work effort and incentives to upgrade one’s skills.
 
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