Wage subsidy in the DRC: A CGE analysis

Lumengo Bonga-Bonga; Jean Luc Erero

doi:10.24294/jipd.v8i7.4252

Home - JIPD - Volume 8 - Issue 7

Submit to JIPD

Journal Browser

Volume | Year

Issue

• Current lssue

View All

News and Announcements

View All

Wage subsidy in the DRC: A CGE analysis

Lumengo Bonga-Bonga

Jean Luc Erero

Journal of Infrastructure Policy and Development 2024, 8(7), 4252; https://doi.org/10.24294/jipd.v8i7.4252

Submitted：16 Jan 2024

Accepted：08 Mar 2024

Published：30 Jul 2024

Download PDF(735.12KB)

Cite

XML

Abstract

This paper analyzes the impact of wage subsidies on lower-skilled formal workers in the Democratic Republic of Congo (DRC). It employs a multi-sectoral, empirically-calibrated general equilibrium model to capture the economy-wide transactions between the formal and informal sectors and assess policy simulations in the DRC. The simulations, both in the short and long run, indicate that when the government provides wage subsidies to lower-skilled workers, it significantly improves the real disposable incomes of both formal and informal households. There is a general increase across formal and informal sectors in real household disposable incomes due to the wage subsidy. The results show that subsidy allocation narrows the income gap between high and low-income households, as well as between formal and informal sectors. The findings are insightful for wage policy simulations, as the wage subsidy targeting lower-skilled formal workers increases real GDP from the expenditure side by 1.19% and 3.19% in the short and long run, respectively, from the baseline economy.

Keywords

References

Adams, P. D. (2003). Interpretations of Macroeconomic Results from a CGE Model such aGTAP. Paper delivered at the 6th Annual Conference on Global Trade and Policy Analysis, The Hague, Netherlands.

Aikaeli, J., & Mkenda, B. K. (2014). Determinants of informal employment: A case of Tanzania’s construction industry. Botswana Journal of Economics, 12(2), 51–73. https://doi.org/10.2139/ssrn.2706021

Akeju, K. F., & Olanipekun, D. B. (2014). Unemployment and economic growth in Nigeria. Journal of Economics and Sustainable Development, 5(4), 138–144.

Alexander, C., & Warwick, K. (2007). Governments, Exports and Growth: Responding to the Challenges and Opportunities of Globalisation. The World Economy, 30(1), 177–194. https://doi.org/10.1111/j.1467-9701.2007.00877.x

Baah-Boateng, W. (2015). Unemployment in Africa. International Journal of Manpower, 36(5), 650–667. https://doi.org/10.1108/ijm-02-2014-0047

Baldry, K. (2015). Graduate unemployment in South Africa: social inequality reproduced. Journal of Education and Work, 29(7), 788–812. https://doi.org/10.1080/13639080.2015.1066928

Beqiraj, E., & Tancioni, M. (2023). Subsidizing new jobs in the Euro-zone periphery. International Review of Economics & Finance, 86, 380–401. https://doi.org/10.1016/j.iref.2023.03.018

Blumkin, T., Pinhas, H., & Zultan, R. (2020). Wage Subsidies and Fair Wages. European Economic Review, 127, 103497. https://doi.org/10.1016/j.euroecorev.2020.103497

Bosch, M., & Esteban-Pretel, J. (2012). Job creation and job destruction in the presence of informal markets. Journal of Development Economics, 98(2), 270–286. https://doi.org/10.1016/j.jdeveco.2011.08.004

Burns, J., Edwards, L., & Pauw, K. (2013). Revisiting wage subsidies: How pro-poor is a South African wage subsidy likely to be? Development Southern Africa, 30(2), 186–210. https://doi.org/10.1080/0376835x.2013.801197

Chigunta, F. (2017). Entrepreneurship as a possible solution to youth unemployment in Africa. Laboring and learning, 10(2), 433–451.

Davies, R., & Thurlow, J. (2010). Formal-informal economy linkages and unemployment in South Africa. South African Journal of Economics, 78(4), 437–459. Portico. https://doi.org/10.1111/j.1813-6982.2010.01250.x

Edwards, L. (2001). Globalisation and the skills bias of occupational employment in South Africa. South African Journal of Economics, 69(1), 40–71. https://doi.org/10.1111/j.1813-6982.2001.tb00002.x

Go, D. S., Kearney, M., Korman, V., et al. (2009). Wage Subsidy and Labor Market Flexibility In South Africa. In Policy Research Working Papers. The World Bank. https://doi.org/10.1596/1813-9450-4871

Golub, S., & Hayat, F. (2014). Employment, Unemployment, and Underemployment in Africa. The Oxford Handbook of Africa and Economics, 135–153. https://doi.org/10.1093/oxfordhb/9780199687114.013.25

Horridge, M. (2002). ORANI-G: A generic single-country computable general equilibrium model. Paper prepared for the practical GE Modelling Course, 7–11 February.

Huttunen, K., Pirttilä, J., & Uusitalo, R. (2013). The employment effects of low-wage subsidies. Journal of Public Economics, 97, 49–60. https://doi.org/10.1016/j.jpubeco.2012.09.007

International Labour Organization (ILO). (2020). ILOSTAT database. Available online: https://ilostat.ilo.org/ (accessed on 8 March 2024).

Kaiser, U., & Kuhn, J. M. (2016). Worker-level and firm-level effects of a wage subsidy program for highly educated labor: Evidence from Denmark. Research Policy, 45(9), 1939–1943. https://doi.org/10.1016/j.respol.2016.05.008

Kawaya, S. P. (2008). The Issue of Social Security for Migrants in the Democratic Republic of Congo. University of Kinshasa, Department of International Relations.

Levinsohn, J., & Pugatch, T. (2014). Prospective analysis of a wage subsidy for Cape Town youth. Journal of Development Economics, 108, 169–183. https://doi.org/10.1016/j.jdeveco.2014.02.006

Lombardi, S., Skans, O. N., & Vikström, J. (2018). Targeted wage subsidies and firm performance. Labour Economics, 53, 33–45. https://doi.org/10.1016/j.labeco.2018.04.002

Mensah, J. T. (2024). Jobs! Electricity shortages and unemployment in Africa. Journal of Development Economics, 167, 103231. https://doi.org/10.1016/j.jdeveco.2023.103231

Pauw, K., & Edwards, L. (2006). Evaluating the general equilibrium effects of a wage subsidy scheme for South Africa. South African Journal of Economics, 74(3), 442–462. Portico. https://doi.org/10.1111/j.1813-6982.2006.00082.x

Schünemann, B., Lechner, M., & Wunsch, C. (2015). Do Long-Term Unemployed Workers Benefit from Targeted Wage Subsidies? German Economic Review, 16(1), 43–64. https://doi.org/10.1111/geer.12040

Sjögren, A., & Vikström, J. (2015). How long and how much? Learning about the design of wage subsidies from policy changes and discontinuities. Labour Economics, 34, 127–137. https://doi.org/10.1016/j.labeco.2015.03.009

Sultana, N., Rahman, M. M., & Khanam, R. (2022). Informal Sector Employment and Economic Growth: Evidence from Developing Countries in SDG Perspective. Sustainability, 14(19), 11989. https://doi.org/10.3390/su141911989

Todaro, M. P., (1969). A Model of Labour Migration and Urban Unemployment in Less Developed Countries. American Economic Review, 59, 138–148.

World Bank. (2008). World Bank Board Discusses Inspection Panel Investigation of Forest Sector Operations in the Democratic Republic of Congo.

World Bank. (2009). The Macroeconomic Foundation, World Development Report. Oxford University Press.

World Bank. (2010). World Bank Development Indicators. World Bank.

World Bank. (2019). The World Bank Annual Report 2019: Ending Poverty, Investing in Opportunity. World Bank.

Previous
article in this issue

Next
article in this issue