The Algerian Retrenchment System: A Financial and Economic Evaluation

The government of Algeria has adopted a new retrenchment system to facilitate labor shedding in a public sector characterized by redundant workers and in an environment of already high unemployment. This article assesses the financial viability of the retrenchment system and the inherent welfare costs and benefits associated with layoffs. A financial flows model tracks the Unemployment Insurance Fund’s revenue and expenditure flows during the projected five-year adjustment period. It finds that even in the presence of massive retrenchment (21 percent of formal sector employment), the fund accumulates reserves equivalent to nearly 2 percent of gross domestic product. Because many displaced workers will end up in the informal sector, the resulting productivity gains or losses depend crucially on the initial level of productivity in the public sector. At the same time, retrenchment entails unambiguous benefits by reducing subsidies to state-owned enterprises, thereby generating efficiency gains. Considering these two effects together, the welfare model estimates that retrenching 13 percent of the formal sector will generate annual net welfare gains ranging from costs of $358 million to gains of $774 million.