A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns

42 Pages Posted: 27 Sep 2006

See all articles by Ravi Kanbur

Ravi Kanbur

Cornell University; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Arnab K. Basu

College of William and Mary - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

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: Employment guarantees, employment targeting, credibility, poverty aversion

JEL Classification: I38, J21, K31, O12

Suggested Citation

Kanbur, Ravi and Chau, Nancy H. and Basu, Arnab K., A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns (August 2006). CEPR Discussion Paper No. 5784. Available at SSRN: https://ssrn.com/abstract=933132

Ravi Kanbur (Contact Author)

Cornell University ( email )

301-J Warren Hall
Ithaca, NY 14853
United States
607-255-7966 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://www.kanbur.dyson.cornell.edu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Arnab K. Basu

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States
757-221-1318 (Phone)
757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

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