Islamic versus Conventional Fiscal policy: The Effect of Zakat on Education and Employment

Abstract

Zakat is one of the pillars in Islam. It is the portion of a man’s wealth designed for the poor. It is deemed to empower eight specific groups in society, i.e. the poor, the needy, those in debt, those in the wayfarer, the sympathizers, those in the cause of God, those in bondage and the fund administrators. The main goal of Zakat is to alleviate poverty through assistance to the poor and the needy and to achieve socioeconomic justice by closing the gap between the poor and the rich in the society. This paper focuses on the effect of Zakat on employment namely the effect of subsidising education of individuals who fulfil the criteria to be recipients of Zakat, thought taxing rich workers who are above Nisab, on employment. We also compare this Islamic policy (zakat) with the conventional one (namely subsidising education of all individuals by taxing their wages) used by most of countries and evaluates the effectiveness of both fiscal systems in reducing unemployment. We develop a theoretical neoclassic model showing that the conventional fiscal policy does not affect employment, which may justify the persistence of high unemployment rates observed in many developed and developing countries despite the massive public resources devoted to the education sector in these countries. The model proves that the Islamic fiscal policy will reduce unemployment.