Is the minimum wage subsidy the way to go in dealing with unemployment in Kenya?

It is not an issue of contention that the level of unemployment is at an all-time high in Kenya.

Unemployment has become a global problem because it affects both the developing and the developed countries. Kenya has had its share as the level of unemployment particularly among the youth has continued to soar every year. By the end of last year, Kenya’s unemployment rates stood at 46%. Out of the unemployed, 70% comprised of the youth aged between 18 and 35, which translates to approximately 10 million Kenyans. The Jubilee Government has been struggling to create the 100,000 jobs every year it had promised Kenyans in its manifesto. So what is the government doing wrong; or what is the government omitting in dealing with the scourge of unemployment in Kenya?

All we have heard from successive governments is appeals by the president and senior government officials for foreign investors to come and pitch camp in Kenya with the aim of creating more jobs. However, even with the entry of the said investors, the level of unemployment is still very high. Kenya has witnessed corporate inversion in different sectors of the economy, including the hospitality sector. However, most of these foreign corporations are only headquartered in Kenya with the aim of marketing and distribution of their products, while their production plants are located overseas where production costs are considerably lower. This therefore implies that, such corporations employ just a handful of midlevel employees and a bare minimum of the unskilled and semi-skilled workers, leaving most of the minimum wage earners in the cold.

That said, what is the other alternative that the government could employ to deal with unemployment? Kenya has utilized several policies aimed at lowering the rates of unemployment, which haven’t bore much fruit. It is time we looked in a different direction. How could we encourage existing companies to employ more people? Could the answer lie in the minimum wage subsidy? The wage subsidy has been used in both the developing and developed countries in order to raise the employment levels. In developed countries where there are constraints of labor supply attributed to reservation wages, the subsidy is directly offered to employees the moment they get employed. However, in the context of developing countries such as Kenya, where the labor market malfunction is typified by unemployment, a subsidy paid to the firm as an incentive to employ more workers is more appropriate.

The concept of the company-side wage subsidy is that it lowers the company’s costs of employment, without affecting what the employee earns as salary. Therefore, this will enable the company to employ more people, hence more output. For that reason, the benefits of the minimum wage subsidy will spill over to the rest of the economy. This is because; a higher employment rate will increase the average household income, while the subsidy lowers the average unit production cost lowering the consumer prices. In time, the lower consumer prices could stimulate consumption demand, a factor that could lead to secondary demand for labor as the firms intensify production. Practically, the most effective way is implemented through payment of a specified percentage of the employee’s salary to the employing company as subsidy by the government.

However, this type of policy has its own downside, for instance, the employment gained among the minimum wage workers could come at the expense of other workers, who could be replaced in favour of the minimum wage workers. Additionally, in case the subsidy of a particular employee is restricted to a specified period, without proper monitoring the subsidized workers could be replaced by new subsidized workers once the subsidy period comes to an end; a scenario referred to as churning effect. However, what could cause the major setback to the implementation of such a strategy is how and where to generate financing to run such a strategy. The government will have to reevaluate its budgetary allocations or generate further revenue through higher taxation, a factor that could negate the gains made by the wage subsidy.

All in all, the minimum wage subsidy program has great potential in maximizing employment rates. Careful deliberations should be directed towards adequate policy design as well as implementation issues.