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

Arnab Basu, Nancy Chau and Ravi Kanbur

No 127048, Working Papers from Cornell University, Department of Applied Economics and Management

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 labor 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 labor 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: Labor; and; Human; Capital (search for similar items in EconPapers)
Pages: 42
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: A theory of employment guarantees: Contestability, credibility and distributional concerns (2009)
Working Paper: A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns (2007)
Working Paper: A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:cudawp:127048

DOI: 10.22004/ag.econ.127048

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