According to available statistics, the unemployment rate among university graduates is nearly 40% in Bangladesh. The question is, how can we reduce this massive educated youth unemployment (EYU) rate?
The policymakers need to find an answer to the following question: can we reduce EYU by taking a policy that does not require long term structural reforms?
The answer is affirmative, and this article will tell you how.
A theoretical argument
One of the key dimensions from which the current labour market is viewed differently from that of the classical demand and supply based framework is the simultaneous existence of vacancy and unemployment. In classical economics, vacancy cannot co-exist with unemployment in an equilibrium situation.
This dimension is true for Bangladesh' labour market as well.
The question is what makes a huge number of educated unemployed youths accept the status of unemployment year after year? The educated youths opt for unemployment for a reason: their reservation wage.
High reservation wage has been the most critical factor that motivates them to take two actions: take unemployment as an option or wait longer to get the desired job. This simple intuition is more than enough to explain the current high unemployment situation.
Employment search and reservation wage
In our country, educated youths have a high reservation wage. They prefer to be unemployed if they do not find their desired job in a particular sector. For example, a university graduate who is preparing for a bank job for the last two years has set a high reservation wage in his mind below which he is not willing to accept any work or he is simply not willing to work in any other sector except banking.
Similarly, a person who has been studying for the last three years for BCS or other government jobs has also set up a high reservation wage bar which motivates him to wait longer until he or she succeeds.
So, the link is clear: higher reservation wage motivates people to take unemployment as an alternative or reduces search for alternative employment options in the job market; they simply get stuck into one option for a long time.
Reservation wage and reduced employment search
In the western countries, one of the key components of reservation wage is unemployment benefits (monthly minimum payment by the government). We know that higher the unemployment benefits, higher the reservation wage, and the less likely a person to accept a job if the wage is below the reservation wage.
In our country, there are social benefits that come from families. This support enters into their reservation wage. However, there is another very critical factor that enters into reservation wage calculation, and that is "bad policy incentive". A bad policy can increase the reservation wage of educated youths and motivate them to get stuck into unemployment for a longer time.
A simple proposal
The proposal is to remove the bad policy incentive that increases reservation wage. Going back to bank jobs or BCS jobs, the bad policy is to encourage or permit people to wait for the same job year after year.
This has increased the length of the queue of people lining up for a specific job each year. So, the solution is to cut the length of the queue short. We urge the government to implement a policy mandating that people from any background get only two chances to sit for any kind of government job or bank job.
If a person sits for an exam and does not qualify, he should not be allowed to take the same exam a second time. This simple policy would achieve two objectives: lower reservation wage and force people to search for alternative jobs or employment options and get into employment faster.
An experimental evidence: Hartz IV reform in Germany
Hartz IV reform carried out in Germany in 2004 provides empirical evidence for why the above proposed policy would lower the unemployment rate. Before Hartz IV reform in Germany, people who were unemployed used to get 70% of the salary from their previous jobs for up to three years.
After three years, they received a long term benefit, consisting of more than 50% of their salary from their previous job until retirement. After Hartz IV, the unemployed got 70% of their previous salary for only one year.
After one year, they were provided with some minimum unemployment benefits on the condition that they must show that they are searching for jobs and receiving training to get jobs.
If anyone is too lazy to search for work and is simply enjoying free unemployment benefits, their minimum unemployment benefits are further lowered. This policy reduced reservation wage; people had to look for jobs because otherwise they faced further reduction in unemployment benefits.
Hartz IV forced people to look for jobs that even paid lower wages than their expected jobs. After 2005, the unemployment rate in Germany fell from above 12% to less than 7% in 2017, mainly due to Hartz IV reform.
Brigitte Hochmuth documented that Hartz IV created one million additional jobs in Germany.
Md Jamal Hossain is a student studying at the University of Berlin, Germany. He can be reached at: firstname.lastname@example.org.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.