Energy and Labour Reform: Evidence from Iran
Omar H. Alshehabi
Gulf University for Science and Technology; Gulf University for Science and Technology - Gulf Centre for Development Policies
September 28, 2011
Journal of Policy Modeling, Forthcoming
Taking Iran as a case study, we analyze the effects of eliminating crude oil and fuel subsidies on the labour market using two alternative policy options. The first redistributes additional revenue as extra income to households, while the second directs revenue into increased investment. We investigate immediate versus gradual subsidy removal, focusing on the transition dynamics at play. A purpose-built dynamic Computable General Equilibrium model is deployed with a unique Social Accounting Matrix of Iran. It is shown that rebating the extra revenue to households would adversely affect the labour market. Industries and employment contract due to the Dutch Disease effect and the more expensive fuel inputs. Channeling extra revenue into investment, however, considerably improves the labour market's fortunes in the long run via increased capital accumulation and shifts in industrial composition. Gradual subsidy removal allows for a smoother transition that minimizes short-run costs in the labour market.
Keywords: Unemployment, Oil, CGE, Subsidies, Iran
JEL Classification: C68, E24, H50, J23, O53, Q43Accepted Paper Series
Date posted: April 20, 2012
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