Equivalence of Emiratization targets and payroll taxes

Emiritazation target: Let’s say that the UAE government requires that at least 10 percent of your employees must be Emiratis. Let’s say that you can hire labor in an open international market and hire all the labor you want at a wage of W. Let’s say that Emiratis will not accept an offer for less than Y, and Y > W.

For every 9 foreigners you must hire an Emirati. The effective wage for another unit of labor is

0.9W+ 0.1Y.

Thus, the 10% mandate has the effect of increasing the wage you must pay by

0.9W+0.1Y-1.0W = 0.1(Y-W)

Payroll tax: Suppose the UAE government instead taxes you 0.1(Y-W) per employee regardless of nationality. This increases your effective wage by the amount of the tax. (Students of economics: supply of labor is perfectly elastic.) Suppose the UAE government does not keep that money but transfers 0.1(Y-W) to any Emirati who accepts your job offer. The Emirati will now accept your offer of W because she ends up with Y.

Equivalence: There exists an equilibrium under this payroll tax which is identical to the equilibrium with the Emiratization target. An Emiratization target could guide you to that equilibrium without creating all the incentives that would otherwise make it very costly to enforce the rule. For instance, firms would have no incentive to use outsourcing of labor purely for the motive of defeating the Emiratization target.