Do Wage Subsidies to Nationals Enhance Their Employability? New Evidence from Kuwait

Abstract

Due to the persistent unemployment of nationals in the midst of millions of gainfully employed foreign workers, Kuwait, the focus of this study, introduced a new generation of active labor market policies (ALMPs) in 2000, capped by an expansive wage subsidy to nationals who join the private sector. This study employs the Fully Modified Least Square (FM-OLS) model to evaluate the effectiveness of these policies by means of estimating employment elasticities of Kuwaitis in the private sector in response to wage subsidies. The results show that the subsidies have been ineffective, contrary to their well-documented broad positive impact in industrial economies. This outcome has been attributed generally to wage differentials between Kuwaitis and non-Kuwaitis. This study presents a holistic diagnosis of the problem by challenging the received ‘wage differentials’ as the sole cause.  It identifies a host of heretofore-unidentified structural disequilibria in the labor market that are responsible for the subsidy’s ineffectiveness such as the local economy’s inherent bias towards low-tech methods of production that rely heavily on low-skilled labor, Kuwaitis’ penchant to pursue higher levels of education, low national participation rates in the labor force, the absence of critical vocational training programs, and the government’s liberal immigration policies. Based on the revised prognosis, a new integrated remedial plan of actionable steps is suggested to address the unemployment problem.