Solving Rampant Welfare in the Kuwaiti Labor Market: A study of how high-skilled immigration can increase Kuwaiti private sector employment through capital-skill complementarity

Abstract

The government of Kuwait has been in a deficit for the 8 of the past 9 years, and it is poised to be in a deficit again this year. The largest expended item under the government’s closing accounts is the ‘wages and compensation’ item, and 85% of employed Kuwaitis work in the public sector. This paper confirms Krusell et al.’s findings that capital and high-skilled labor are complements and correlate with an increase in high-skilled wages. This paper takes the result further by calling for an increase in high-skilled labor, through immigration attraction, in order to raise the private sector’s wages. Because the private sector has constant returns to scale compared with the government sector’s decreasing returns to scale, an increase in total high-skilled labor is found to significantly increase the wage of Kuwaitis in the private sector more than the wage of Kuwaitis in the government sector. Therefore, when the wage in the private sector rises, Kuwaitis will have a greater incentive to work in the private sector as the private sector wage competes with the that of the government sector.