Wage Subsidy in the DRC: A CGE Analysis

Working paper 372
Author(s): 
Jean Luc Erero, Daniel Djauhari Pambudi and Lumengo Bonga Bonga
Publication date: 
September, 2013
Classification-JEL: 

This paper analyses wage subsidies on lower-skilled formal workers in the Democratic Republic of Congo (DRC). A multi-sectoral empirically-calibrated general equilibrium model capturing the economy-wide transactions between the formal and informal sectors is used to analyse one policy simulation in the DRC. The short and long run simulation in which the government provides wage subsidy to lower-skilled workers indicates that the government is able to significantly improve the deficiencies of the formal and informal households’ real disposable incomes. There is a general increase across formal and informal sectors in real household disposable incomes due to wage subsidy. The simulation results show that subsidy allocation narrowed the income gap between high and low income households, and between formal and informal sectors as well. The result seems somewhat insightful for wage policy simulation as the wage subsidy that targets 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.

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