In the face of the global coronavirus pandemic, supply and demand shocks to the economy have caused businesses in Bahrain to suffer from a significant reduction in economic activity, which has negatively impacted their individual levels of productivity. This has had consequences for the ability of said businesses to retain their current levels of employment during these challenging times. At the end of June, 2020 the Bahraini government decided to extend the financial stimulus package for the private sector, and subsidize 50% of wages for insured Bahraini employees in the most adversely affected industries for 3 additional months, from July to September of 2020.
What are the benefits of this policy?
This is a desirable initiative that provides insurance against unemployment by supporting Bahraini citizens’ jobs in the private sector. As citizens are the main focus of government schemes at these times of crisis, the intention is to minimize the increase in unemployment of Bahrainis as a result of the supply and demand shocks to the economy. Without this initiative, businesses would struggle to access the liquidity required to hold on to their current workers, forcing them to downsize and trigger a substantial rise in unemployment. This observation is characteristic of the countercyclical relationship, or the negative correlation, between economic output and unemployment in the economy, given by Okun’s law (Okun, 1962).
This latest initiative will build on the already spent BHD215 million from April to June on the full wages of all 100,000 Bahraini employees working in private companies registered with the Social Insurance Organisation (SIO). The wages are being paid by the SIO from the Unemployment Insurance Fund. Instead of completely withdrawing the stimulus, the government is choosing to have a minimised stimulus package for the next period of BHD70 million that is tailored to the industries that have been hard-hit by the pandemic. This strategy of a gradual withdrawal is aimed at continuing to support businesses so that unemployment continues to stabilize towards the desired level, while at the same time allowing businesses to ease back into their pre-COVID19 wage responsibilities prior to the reopening of the economy.
How effective is this policy?
In order to evaluate the effectiveness of the scheme, we need to consider the likelihood of its success in the minimization of unemployment among Bahrainis in the country. The following table shows the different private sector industries in Bahrain, arranged by both the employment of Bahrainis and the labour productivity level in Q2, 2019.
Source:
LMRA, Table_06 for employment levels in the Private workforce.
CIO Quarterly Report, 2019 for calculating Productivity levels.
Notes:
Productivity is defined as output divided by inputs. Here, we have used output per worker as the definition of labour productivity.
For Limitations, please see the end of the article.
Within the private sector, the industries of Trade, Manufacturing and Construction employ the most Bahrainis, with around 24%, 16% and 13% of the total Bahraini private sector employment respectively*. However, they also make up some of the least productive private industries in the country, all having productivities well below the average of around 52,000 BHD per worker**. In combination, these patterns are particularly problematic for Bahraini unemployment as a result of COVID19’s economic impact. For example, almost a quarter of Bahrainis in the private sector are employed in Trade, but the industry has the second lowest productivity of all industries in the sector. Businesses in such industries will find it difficult to pay their workers due to the nature of the productivity in the industry when it is struck by the shocks of the pandemic. Furthermore, as a result of the employment profile in the industry, a large number of Bahrainis will be at risk of losing their jobs during the crisis. Since certain industries are more susceptible to layoffs than others, and those industries are the ones that employ the most Bahrainis, there may be more effective ways to minimize unemployment among Bahrainis than to subsidize a fixed 50% of wages across all industries affected by the pandemic.
What are some considerations for future policy?
The government will be preparing for the possibility of a second wave of coronavirus cases near the end of the year, and will hope to devise the most effective strategy to respond with. If the government aim is once again to minimize unemployment of its citizens after the next economic shock, then a better approach would be to prioritise specific affected industries that are likely to lay off the most Bahrainis. In particular, they could target industries like Trade, Construction and Manufacturing by paying a share greater than 50% of wages, because citizens’ jobs are most vulnerable there as a result of high numbers of Bahraini employment and low levels of productivity. If it is deemed that Bahraini jobs are secure enough in other private industries, then to balance the budget of the scheme, the government could decide to pay a share of wages that is less than 50% in these industries. Therefore, rather than having a ‘blanket’ policy for the affected industries, the government may introduce measures in proportion to the burden that the industry could place on Bahraini unemployment figures, in order to achieve its target amid a potential shock at the end of 2020.
It should be noted that due to the large number of Bahrainis in the relevant industries, even if the share of aid to other affected industries is reduced, the cost of the scheme is likely to rise if the government increases the share of wages it pays in the industries employing the most Bahrainis. However, it will not be completely infeasible when we consider the positive correlation between productivity and real wage growth (Haldane, 2018; Pessoa and Van Reenen, 2014). The estimated average wages in private sector industries can be seen in the following table, arranged from highest to lowest.
Source:
LMRA, Table_22 for employment levels in the Private workforce.
Notes:
The data is arranged into the same format as GDP economic activity data reported, thus different economic activities reported under LMRA are reclassified and re-averaged into the Economic activities as defined by CIO’s Quarterly reports.
For Limitations, please see the end of the article.
We can see that the Trade industry, for example, has an estimated average wage well below the average of around BHD800 in the private sector***. Therefore, it is still relatively affordable to subsidize a higher share than 50% of its Bahrainis’ wages, and the cost of doing so will not be such a substantial change from the initial proposition.
In conclusion, Bahrain is still in the midst of its first wave of coronavirus cases and the wage subsidy for affected industries is a desirable policy to introduce to combat the impact of the pandemic on the Bahraini labour force. However, despite its higher cost, a policy that is tailor-made to the structure of the labour market would be more effective in helping the country ride a potential second wave of cases, with significantly less damage done to its citizens’ jobs.
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LIMITATIONS
*The total here represents Bahrainis in the private sector without those who are classified as “not specified” and those who are classified as “public administration”. The actual total is 94,134.
**The average productivity as calculated by GDP/worker in each sector is the average across industries, not the actual average productivity across the economy. Across industries was selected to look at how productivity differs from industry to industry rather than weighting them according to how much of their productivity is represented across the economy. When weighting the productivity levels according to how many employees are employed in each industry, the actual productivity rate across the economy is 22,202.08BHD/worker.
***Data does not include those who are classified as “not specified” and “public admin”.