## _092713

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---

### I. Introduction: purpose and framework
- Supplement provides case studies of how countries addressed jobs and growth challenges and how Fund staff helped.
- Case studies follow four questions:
  - What was the initial situation regarding growth, employment, and income distribution?
  - What policy measures were implemented to enhance growth and employment and to even out the distribution of income? Were complementarities or trade-offs considered?
  - How did Fund staff help the authorities? (areas of analysis, methods, considerations shaping recommendations)
  - What were the results of policy actions taken?

### II. Cross-cutting findings from the case studies
- Advanced countries:
  - Improving labor market functioning is a key issue (examples: Spain—labor market duality; Germany and Korea—strengthening incentives to take up work).
- Emerging markets:
  - Labor market reform is important (example: Mexico).
  - Other challenges include improving income distribution (Brazil and Namibia) and avoiding the middle-income trap (Malaysia).
- Low-income countries:
  - Raising tax revenue to allow greater public investment and social spending is important (example: Haiti).
- Hydrocarbon revenue management:
  - Cross-cutting challenge (examples: Algeria, Bahrain, Republic of Congo, and more recently Ghana).
- Selected evaluative findings:
  - German and Mexican labor market reforms are seen as having helped, or likely to help, reduce unemployment and support growth.
  - Overall impact of Spanish reforms appears less certain so far given the presently high rate of unemployment.
  - A contributing factor to differing outcomes: Germany and Mexico implemented reforms in a stable macroeconomic environment while Spain did so in very difficult circumstances.
- Korea (preliminary staff research) estimates:
  - Removing disincentives from tax treatment of second earners, increasing childcare benefits, and facilitating more part-time work could lower the gap between male and female participation by about one third.
  - Policy actions aimed at enhancing skills, such as retraining programs, could lower skills mismatches and substantially raise youth employment.
- Brazil:
  - In a context of stability-oriented macroeconomic policies, well-targeted social transfers can help support inclusion at a limited budgetary cost.
  - Reforms lowering compliance costs (e.g., simplified taxation for small businesses) can support labor market formalization.
- Malaysia:
  - Policies aimed at broad economic inclusion can help development from low- to middle-income level.
  - Transition to advanced country status requires gains in education and possibly strengthening of institutions.
- Bahrain:
  - In countries with hydrocarbon revenue and large supplies of low-cost foreign labor, a combination of education and training initiatives with limits on and taxation of foreign labor can raise private sector employment of nationals.
  - Avoiding a large public sector wage premium that undermines nationals’ incentives to take up private sector employment is important.

### III. Algeria: structural reforms to raise growth and employment
- Context and constraints:
  - Hydrocarbon sector accounts for 98 percent of total exports and more than 65 percent of the budget resources.
  - Public sector dominates the economy; growth in private and nonhydrocarbon sectors inhibited by regulatory constraints, insufficiently developed financial sector, and limited openness to trade and foreign investment.
- Growth and labor market performance:
  - Growth over the 2000s averaged 3.5 percent overall, reaching 6 percent in the nonhydrocarbon sector.
  - Long-term potential could be as high as 6 percent per year.
  - Unemployment rate fell from 29.5 percent in 2000 to 10 percent in 2011.
  - Contributing factors to unemployment decline:
    - Working-age population growth declined from 3.6 percent in 1990 to 1.8 percent in 2011.
    - Low, stable and somewhat declining participation rates.
    - Rapid increase in employment with acceleration of growth in the nonhydrocarbon sector, led by rising public sector investment.
- Active labor market policies (launched in 2009) aimed at youth included:
  - Tax exemptions for employment-creating small and medium enterprises.
  - Interest subsidies and guarantees for credit extended to young entrepreneurs.
  - Subsidies to employers’ social security contributions.
  - Technical support to small entrepreneurs (market analysis, legal support), training and skills development programs.
  - Impact: sustained impact not yet clear; likely contributed to decline in unemployment especially for the highly educated (their unemployment declined from 21.4 percent in 2010 to 16.1 percent in 2011).
- Unequal outcomes:
  - Unemployment rates relatively low for males above 25 years old; much higher for women, the youth and the highly educated.
- Elasticity of employment to output:
  - Overall elasticity of employment to growth was on average close to 0.64 over 1993-2010.
  - Recent estimates (1990-2012) indicate overall elasticity remained close to 0.6 on average in Algeria.
  - Elasticity for Algeria somewhat lower than the average of the 9 MCD countries with significant estimates.
- Implications from jobs-and-growth template and Article IV scenarios:
  - Strong and sustained growth would be required to reduce unemployment given the prevailing elasticity.
  - Broad and deep structural reforms—including labor market reforms—would be needed to increase the elasticity of employment to growth.
- Sources of rigidities affecting growth-employment elasticity:
  - Micro rigidities: labor market duality; high protection of permanent, formal workers (mostly public sector) leading to large informal economy with limited employment protection.
  - Macro rigidities: relatively large tax wedge on formal employment; existence of a minimum wage increasing faster than productivity; relatively high public wages compared to private sector wages.
- Empirical analyses:
  - Algeria desk (2011) found improvement in labor market policies (Fraser Institute’s labor market flexibility index) helped lower unemployment in a sample of 140 countries over 1980-2008; impact was higher in Algeria than sample average and dynamic estimates point to a lasting impact.
  - Results likely strengthened if labor market reforms are complemented by structural measures to enhance trade openness, competitiveness, competition and private sector orientation.
- Policies to increase growth (discussion points with authorities):
  - Support higher investment: direct public capital spending toward high economic return projects; improve quality of spending; better leverage private sector participation.
  - Improve environment for private investment: lower cost of doing business; improve tax administration; facilitate trade; improve access to finance, notably for privately-owned SMEs.
  - Support efficient, knowledge-driven economy: larger openness to trade and FDI; policies to enable innovation and technological absorptive capacity; investment in education, training, and health; strengthen institutions, government effectiveness, business climate, and competitive environment.
- Policies to increase employment:
  - Reforms to improve labor market efficiency could reduce unemployment in short and medium term.
  - Less structural reforms that require less consensus building are possible, notably measures to reduce search and hiring costs such as lowering high payroll taxes to integrate women and young workers.
  - Address skills mismatches: private sector has not created sufficient demand for skilled workers; student distribution skewed toward humanities, social sciences, law and education, creating shortages in skills needed by private sector.
  - Active labor market policies should improve job matching efficiency and enhance skills of the unemployed; structural policies should aim at “education for employment”.
  - Reforms improving business climate and product market competition are key to increase labor demand over the medium-term; lower barriers to entry would curb market power and incumbents’ rents, reduce wage claims, and help close gap between productivity and real wages.

### IV. Bahrain: labor market reforms — initiatives and results
- Background and timeline:
  - Labor market reform initiative was launched in 2004 with the aim of improving job opportunities for nationals and facilitate mobility of non-nationals.
  - Reforms were spearheaded by the Economic Development Board (EDB) tasked with promoting Bahrain’s Vision 2030.
  - Reform elements included: the National Employment Project (a job-matching/placement program for unemployed nationals, which operated for 18 months), the Labor Market Regulatory Authority (LMRA), the Labor Fund (LF) “Tamkeen,” and the Unemployment Insurance Program.
  - Bahrain requires a minimum “Bahrainization ratio,” under which the share of Bahraini nationals in the work force of various economic sectors must attain certain minima.
- Growth and employment patterns:
  - Real non-oil growth averaged 9.6 percent during 2000–07.
  - Average annual real non-oil growth during 2008–11 was 4.6 percent.
- Labor market segmentation and outcomes:
  - At end-2012, Bahraini nationals constituted around 49 percent of the population.
  - Bahraini nationals accounted for 85 percent of employees in the public sector and 20 percent of employees in the private sector.
  - About 40 percent of the Bahraini nationals labor force is employed by the public sector.
  - Nationals attracted to public-sector employment by high public-sector wages and lower working hours, which set relatively high reservation wages for private-sector employment.
  - Non-nationals are employed mostly by the private sector and are generally paid lower wages than nationals in similar positions.
  - Despite high growth and public sector absorption, unemployment among nationals reached a high of 16 percent in 2006, largely due to skill mismatches and availability of cheaper expatriate labor.
- Fiscal and structural constraints:
  - Bahrain has limited fiscal resources; oil reserves are small relative to neighbors, limiting ability to employ nationals in the public sector.
  - Main long-term challenge: continue to diversify away from oil; need to upgrade domestic labor force for private sector productivity and innovation.
- Emphasis of Bahrain’s labor reform program:
  - Focuses on training and skill building of the Bahraini labor force.
- Labor Fund (Tamkeen):
  - Provides training programs and support to enterprises to foster private sector development and employment.
  - Administers training institutes for job seekers and employers.
  - Supports small and medium-sized enterprises (SMEs) to improve productivity, including facilitating access to affordable loans from commercial banks by providing guarantees.
  - Conducts industry and product exhibitions, and facilitates information flow between firms and customers and between job seekers and employers.
  - Funding: levies on non-nationals’ salaries finance the Labor Fund program fully.
  - Tamkeen costs averaged about 0.6 percent of GDP during the period 2006-12.
- Ministry of Labor programs and planned initiatives:
  - Current programs:
    - Training new graduates in basic skills to prepare them for employment.
    - Subsidizing part of private-sector wages paid to nationals in initial employment stages: BD 150–200 per month for two years.
    - Cooperating with the private sector on skill improvement programs and on-the-job training.
    - Specialized courses (lectures and hands-on training) for technical professions such as law and engineering.
    - Development of a national apprenticeship program modeled after Germany’s system.
  - Initiatives in preparation:
    - Establishment of a skills assessment center to provide skill certificates for both Bahraini and expatriate workers.
    - Development of a market intelligence unit with the EDB to understand future market skill needs.
    - Developing occupational standards (for 125 occupations) to help develop training standards and inform skills assessment design and educational curriculum.
- Measures to increase female labor force participation:
  - Provision of two non-national permits for each female national employee hired.
  - A job-sharing program that allows two female employees to work part-time by sharing one full-time position.
- Unemployment insurance and related provisions:
  - Unemployment insurance scheme is fully funded from employers’ and employees’ contributions, and levies on non-nationals.
  - Unemployment insurance provides income for the unemployed (for 12 months), and for new entrants to the labor market (for six months).
  - All beneficiaries are required to join a training and placement program.
- Outcomes and key statistics:
  - Unemployment rate fell from a high of 16 percent in 2006 to below 4 percent by end-2012.
  - Rate of growth of nationals’ public sector employment slowed from 5 percent during 2002–06 to 2 percent in 2007–12.
  - Highest growth in nationals’ private sector employment was in trade (which includes the hospitality sector), followed by finance.
  - Number of women nationals in sectors such as retail has been on the rise in recent years.
  - In 2009, Bahrain became the first GCC country to end the sponsorship system for foreign workers, allowing workers to move jobs without the permission of their employer.
- IMF staff involvement and recommendations:
  - Staff welcomed the reforms and the emphasis on vocational training, social insurance for SMEs, and consultation with unions and the business community.
  - Initial staff recommendations:
    - Ensure the unemployment insurance plan is fully funded to avoid drains on the budget.
    - Use price-based interventions instead of sectoral quotas for Bahrainis.
    - Caution against quickly increasing the cost of expatriate labor to avoid adverse impacts on competitiveness.
  - Recent staff advice:
    - Advise Bahrain (and GCC countries more generally) to avoid public sector wage premia.
    - Authorities generally agree in principle but cite political pressures as reasons for public sector wage increases.
- Prepared by May Khamis and Harold Zavarce (MCD).

### V. Germany: Hartz reforms and labor market transformation
- Historical context and pre-reform problems:
  - From 1970 to 2005 there was a secular increase in unemployment rates in Germany, only partially interrupted but not reversed by cyclical trends.
  - Labor market was characterized by prevalence of long-term unemployment and low job creation.
  - Root causes: high reservation wages (due to high and long unemployment benefits), high firing costs, and rigid wage determination mechanisms.
- Hartz I–IV reforms (approved 2002–03; implemented gradually):
  - Incentivize job creation by reducing firing costs:
    - Hartz I: deregulated the temporary work sector.
    - Hartz II: increased threshold size for firms subject to layoff rules from five to ten workers.
  - Increase incentives for labor supply and job search:
    - Hartz IV: reduced size and duration of unemployment benefits and tightened job-search/acceptance rules.
    - Hartz II: introduced “mini-jobs” (monthly income of less than 400 EUR monthly) exempt from most social security taxes.
  - Improve matching, training, and activation:
    - Hartz III: restructured the Federal labor agency to improve training and matching efficiency.
  - Systemic positioning:
    - Moved Germany closer to “flexicurity”: medium to high employment protection, generous but conditional unemployment benefits, and strong active labor market policies.
- Effects on core jobs and macro-flexibility:
  - Reforms of marginal jobs induced non-legislative changes in the core labor market, creating a second tier of employment and competition in regular employment.
  - Firms and unions introduced flexibility in collectively bargained arrangements (work-time accounts, kurzarbeit).
  - These mechanisms increased macro flexibility and helped firms reduce hours instead of dismissing workers during the crisis.
- Employment outcomes and measured impacts:
  - Broad agreement that Hartz reforms increased employment, possibly with a lag, and gains continued through the recession.
  - Long-term unemployment rate is now 40% lower than its pre-reform peak.
  - The reforms are estimated to have reduced the equilibrium unemployment rates by about 1.2 percent.
  - Positive reform outcomes were complemented by a favorable global macroeconomic environment in the pre-crisis boom.
- Distributional effects and inequality:
  - Impact on inequality is less clear:
    - Increased labor participation of low-skilled workers may have contributed to observed increases in income inequality.
    - Initially part-time jobs increased; since then part-time jobs stabilized and full-time employment growth has picked up.
- Remaining challenges and policy recommendations:
  - Maintain and enhance training and activation policies to integrate disadvantaged groups and support upward mobility of temporary workers.
  - Address fiscal and tax disincentives for part-timers:
    - Part-timers face steep tax-wedges to increase hours worked, encouraging persistence of marginal employment.
    - Removing fiscal disincentives and providing training can help mitigate risks of persistent marginal employment.
- Source attribution in document: _092713 - 42.      The German labor market has gone through a salient transformation in the last_

### VI. Haiti: poverty, fiscal policy, and revenue mobilization
- Poverty and macro context:
  - GDP per capita in 2011 was about $1000 USD on a PPP basis, which represents a decline of 25 percent from twenty years ago.
  - Almost 80 percent of the population lives in extreme poverty.
  - Inequality is very high, with a Gini coefficient based on market income of 59.2.
  - Employment is low, concentrated in small business and in the informal sector.
- Role of fiscal policy for growth and inclusion:
  - Fiscal policy can promote strong and inclusive growth by creating favorable conditions for growth through macroeconomic stability and using revenue and spending to promote higher living standards.
  - Higher revenue mobilization is a key prerequisite for raising spending in a sustainable manner and thereby reinforcing growth and inclusion.
- Domestic revenue, taxation structure, and constraints:
  - Domestic revenue stood at almost 13 percent of GDP in 2011.
  - Haiti relies heavily on indirect taxation, particularly customs duties and a turnover tax applied on all levels of the production chain.
  - Taxation structure reflects capacity constraints in administration and collection, features a high level of tax expenditures, and does not reflect the needs and compliance challenges of large, medium, and small taxpayers.
  - Haiti’s highest income tax rate takes effect only at very high levels of income, resulting in only weak progressivity.
- Revenue collection reforms under consideration:
  - Plans to replace the turnover tax with a traditional VAT, with study on adoption of a VAT to be completed by December 2013; authorities drafting a VAT law supported by IMF technical assistance.
  - Possible corporate tax reforms mentioned: currently tax on dividends must be added to the corporate income tax; companies cannot deduct taxes on international income.
  - A more progressive income tax system could also be considered.
- Public spending execution and social spending priorities:
  - Haiti has weak capacity for executing capital spending despite enormous infrastructure gaps.
  - Weaknesses reflect fragmentation of the public investment program; cumbersome project execution; weak information and control systems.
  - Recommended reforms to improve execution capacity:
    - define clear responsibility among government institutions;
    - enhance the control system;
    - boost the work of the unit of project executions;
    - promote a dynamic information system.
  - Current expenditures should be reoriented more towards social spending, which are the lowest in the region.
- Prepared by Elva Bova (FAD) and Lawrence Norton (WHD).

### VII. Malaysia, Mexico, and Namibia: reform priorities and case findings
- Malaysia — future challenges and reform priorities:
  - Continuous transformation of the economy and government required to modernize institutions, infrastructure, and skills.
  - Authorities have identified reforms to: improve institutions, raise productivity, improve the effectiveness of education, enhance social insurance and protection.
  - The minimum wage policy and other reforms being debated, including unemployment insurance, should help to insure workers from risk.
  - Key remaining challenges: public debt is relatively high; the budget needs to reduce its reliance on oil and gas revenue; public spending must be better targeted and made more equitable, including by reforming fuel subsidies.
- Mexico — labor market reforms (findings and expected effects):
  - Context and distortions:
    - Labor regulations remained among the most rigid in the OECD and emerging markets.
    - Contracts treated as almost permanent; restrictions on part-time, hourly, and trial hiring; labor courts not favoring swift dispute resolution; high severance pay requirements.
    - About half of the Mexican labor force is employed in the unregulated informal sector.
  - 2012 labor reform main provisions:
    - New contractual modalities: trial and initial training contracts; temporary employment contracts; hourly pay contracts; regulatory framework for outsourcing.
    - Streamlined dispute resolution and capped compensation for unjustified dismissals to one year of salary.
    - Productivity and labor skills take precedence over seniority for promotion; establishment of a National Committee for Productivity.
    - Expansion of worker rights and social protection, including adoption of ILO concept of “decent work” and broad non-discrimination clauses.
    - Measures to improve inclusiveness and gender equality: short-term and hourly contracts to ease part-time opportunities; ban on mandatory pregnancy tests; prohibition on asking a woman to resign because she becomes pregnant; more flexibility in maternity leave timing; more severe penalties for bullying and sexual harassment.
  - Expected quantitative effects:
    - The central bank estimated the labor reform could add about 0.2 percent per year to potential growth.
    - Introduction of a cap on back wages would reduce costs associated with employment termination, implying a reduction of approximately 20 percent in hiring barriers in the formal sector.
  - Education reform linkage:
    - A 2013 education reform law seeks to create a professional system for evaluating, hiring, assigning and promoting teachers and reduce labor unions’ interference on access to teaching positions.
- Namibia — inclusive growth, inequality, and policy recommendations:
  - Recent performance and challenges:
    - Gini coefficient declined from 0.70 in 1993/94 to 0.60 in 2003/04, and to 0.59 in 2009/10.
    - Labor income constituted on average 72.3 percent of total income in Namibia: 49.2 percent corresponding to wages and salaries and 23.1 percent to income from subsistence farming.
    - Unemployment rate remains high at 34 percent (NIES 2009/10).
  - Incidence of growth analysis:
    - Growth incidence curves for 1993/94–2003/04 and 2003/04–2009/10 show positive growth in real consumption per capita for all segments over 1993–2010.
    - Growth was inclusive in 1993/94–2003/04; from 2003/04 to 2009/10 growth became more neutral across deciles and the poorest benefited less relative to earlier years.
  - Policy recommendations to restore inclusive growth:
    - Rationalize and reallocate government expenditures (including tax expenditures) to increase progressiveness while keeping total spending constant.
    - Conduct a thorough analysis of the incidence of public expenditures and correct or eliminate social programs and public transfers that do not reach their intended beneficiaries.
    - Identify and eliminate potential pockets of inefficiencies.

### VIII. Namibia (labor market focus): determinants, TIPEEG, and public wage policy
- Labor as central to inclusive growth:
  - Labor is the main source of income in Namibia, and unemployment has remained very high.
  - Leigh and Flores (2012) show high unemployment in the SACU region is attributable to structural rather than cyclical factors.
  - Structural factors accounting for high unemployment:
    - rapid wage growth above productivity increases;
    - existing skills mismatch;
    - wage policies in the public sector.
  - Note: the Gini coefficient referenced corresponds to income, while the growth incidence curve corresponds to consumption per capita.
- TIPEEG and active labor market interventions:
  - TIPEEG is a temporary workfare program.
  - IMF country team assessment:
    - TIPEEG might have medium-term benefits by allowing youths to enter the labor force and gain job experience.
    - To maximize sustainable job creation potential, TIPEEG needs to be complemented with a skill development component.
- Public sector employment and wage policy impacts:
  - Public sector employs a significant share of the employed population: 16 percent.
  - Government employees (including those working for state-owned enterprises) constitute about one out of every four salaried employees in Namibia.
  - Given government’s size as an employer, government wage policies are likely to affect the functioning of the whole labor market.
  - IMF country team advice:
    - Take into account potential impacts of wage and employment decisions on private sector job creation.
    - Public wage increases should be in line with sustainable increases in labor productivity.
- Policy recommendations (summarized):
  - Complement TIPEEG with a skill development component to enhance sustainable job creation.
  - Address structural labor-market factors:
    - Align wage growth with productivity increases.
    - Reduce skills mismatches through targeted training and education interventions.
    - Reassess public sector wage policies to avoid adverse spillovers to private sector employment.
  - Ensure public wage and employment decisions consider their effect on private sector job creation; restrict public wage increases to levels consistent with sustainable labor productivity growth.
- Source attribution in document: Excerpt from IMF country team analysis on Namibia contained in the content unit provided.

*Source: JOBS AND GROWTH: SUPPLEMENT ON COUNTRY CASE STUDIES, September 27, 2013 (content unit _092713).*

### References ______________________________________________________________________________________ 20

### _092713 - References ______________________________________________________________________________________ 20

### I. Introduction: purpose and framework
- Supplement provides case studies of how countries addressed jobs and growth challenges and how Fund staff helped.
- Case studies follow four questions:
  - What was the initial situation regarding growth, employment, and income distribution?
  - What policy measures were implemented to enhance growth and employment and to even out the distribution of income? Were complementarities or trade-offs considered?
  - How did Fund staff help the authorities? (areas of analysis, methods, considerations shaping recommendations)
  - What were the results of policy actions taken?

### II. Cross-cutting findings from the case studies
- Advanced countries: improving labor market functioning is a key issue (examples: Spain—labor market duality; Germany and Korea—strengthening incentives to take up work).
- Emerging markets: labor market reform is important (example: Mexico); other challenges include improving income distribution (Brazil and Namibia) and avoiding the middle-income trap (Malaysia).
- Low-income countries: raising tax revenue to allow greater public investment and social spending is important (example: Haiti).
- Hydrocarbon revenue management is a cross-cutting challenge (examples: Algeria, Bahrain, Republic of Congo, and more recently Ghana).
- Selected evaluative findings:
  - German and Mexican labor market reforms are seen as having helped, or likely to help, reduce unemployment and support growth.
  - Overall impact of Spanish reforms appears less certain so far given the presently high rate of unemployment.
  - A contributing factor to differing outcomes: Germany and Mexico implemented reforms in a stable macroeconomic environment while Spain did so in very difficult circumstances.
- Korea (preliminary staff research) estimates:
  - Removing disincentives from tax treatment of second earners, increasing childcare benefits, and facilitating more part-time work could lower the gap between male and female participation by about one third.
  - Policy actions aimed at enhancing skills, such as retraining programs, could lower skills mismatches and substantially raise youth employment.
- Brazil:
  - In a context of stability-oriented macroeconomic policies, well-targeted social transfers can help support inclusion at a limited budgetary cost.
  - Reforms lowering compliance costs (e.g., simplified taxation for small businesses) can support labor market formalization.
- Malaysia:
  - Policies aimed at broad economic inclusion can help development from low- to middle-income level.
  - Transition to advanced country status requires gains in education and possibly strengthening of institutions.
- Bahrain:
  - In countries with hydrocarbon revenue and large supplies of low-cost foreign labor, a combination of education and training initiatives with limits on and taxation of foreign labor can raise private sector employment of nationals.
  - Avoiding a large public sector wage premium that undermines nationals’ incentives to take up private sector employment is important.

### III. Algeria: structural reforms to raise growth and employment
- Context and constraints:
  - Hydrocarbon sector accounts for 98 percent of total exports and more than 65 percent of the budget resources.
  - Public sector dominates the economy; growth in private and nonhydrocarbon sectors inhibited by regulatory constraints, insufficiently developed financial sector, and limited openness to trade and foreign investment.
- Growth and labor market performance:
  - Growth over the 2000s averaged 3.5 percent overall, reaching 6 percent in the nonhydrocarbon sector.
  - Long-term potential could be as high as 6 percent per year.
  - Unemployment rate fell from 29.5 percent in 2000 to 10 percent in 2011.
  - Contributing factors to unemployment decline:
    - Working-age population growth declined from 3.6 percent in 1990 to 1.8 percent in 2011.
    - Low, stable and somewhat declining participation rates.
    - Rapid increase in employment with acceleration of growth in the nonhydrocarbon sector, led by rising public sector investment.
- Active labor market policies (launched in 2009) aimed at youth included:
  - Tax exemptions for employment-creating small and medium enterprises.
  - Interest subsidies and guarantees for credit extended to young entrepreneurs.
  - Subsidies to employers’ social security contributions.
  - Technical support to small entrepreneurs (market analysis, legal support), training and skills development programs.
  - Impact: sustained impact not yet clear; likely contributed to decline in unemployment especially for the highly educated (their unemployment declined from 21.4 percent in 2010 to 16.1 percent in 2011).
- Unequal outcomes:
  - Unemployment rates relatively low for males above 25 years old; much higher for women, the youth and the highly educated.
- Elasticity of employment to output:
  - Overall elasticity of employment to growth was on average close to 0.64 over 1993-2010.
  - Recent estimates (1990-2012) indicate overall elasticity remained close to 0.6 on average in Algeria.
  - Elasticity for Algeria somewhat lower than the average of the 9 MCD countries with significant estimates.
- Implications from jobs-and-growth template and Article IV scenarios:
  - Strong and sustained growth would be required to reduce unemployment given the prevailing elasticity.
  - Broad and deep structural reforms—including labor market reforms—would be needed to increase the elasticity of employment to growth.
- Sources of rigidities affecting growth-employment elasticity:
  - Micro rigidities: labor market duality; high protection of permanent, formal workers (mostly public sector) leading to large informal economy with limited employment protection.
  - Macro rigidities: relatively large tax wedge on formal employment; existence of a minimum wage increasing faster than productivity; relatively high public wages compared to private sector wages.
- Empirical analyses:
  - Algeria desk (2011) found improvement in labor market policies (Fraser Institute’s labor market flexibility index) helped lower unemployment in a sample of 140 countries over 1980-2008; impact was higher in Algeria than sample average and dynamic estimates point to a lasting impact.
  - Results likely strengthened if labor market reforms are complemented by structural measures to enhance trade openness, competitiveness, competition and private sector orientation.
- Policies to increase growth (discussion points with authorities):
  - Support higher investment: direct public capital spending toward high economic return projects; improve quality of spending; better leverage private sector participation.
  - Improve environment for private investment: lower cost of doing business; improve tax administration; facilitate trade; improve access to finance, notably for privately-owned SMEs.
  - Support efficient, knowledge-driven economy: larger openness to trade and FDI; policies to enable innovation and technological absorptive capacity; investment in education, training, and health; strengthen institutions, government effectiveness, business climate, and competitive environment.
- Policies to increase employment:
  - Reforms to improve labor market efficiency could reduce unemployment in short and medium term.
  - Less structural reforms that require less consensus building are possible, notably measures to reduce search and hiring costs such as lowering high payroll taxes to integrate women and young workers.
  - Address skills mismatches: private sector has not created sufficient demand for skilled workers; student distribution skewed toward humanities, social sciences, law and education, creating shortages in skills needed by private sector.
  - Active labor market policies should improve job matching efficiency and enhance skills of the unemployed; structural policies should aim at “education for employment”.
  - Reforms improving business climate and product market competition are key to increase labor demand over the medium-term; lower barriers to entry would curb market power and incumbents’ rents, reduce wage claims, and help close gap between productivity and real wages.

### IV. Bahrain: labor market reforms — initiatives and results
- Background:
  - Bahrain enacted labor market initiatives during 2004–06 that contributed to lowering unemployment and significantly slowing growth of public-sector employment.
- Growth and employment patterns:
  - Non-oil economic activity grew rapidly during the 2000s; slowed at end of decade due to the global financial crisis (2008) and domestic political turmoil in 2011.
  - Real non-oil growth averaged 9.6 percent during 2000–07.
  - Average annual real non-oil growth during 2008–11 was 4.6 percent.
- Labor market segmentation and outcomes:
  - At end-2012, Bahraini nationals constituted around 49 percent of the population.
  - Bahraini nationals accounted for 85 percent of employees in the public sector and 20 percent of employees in the private sector.
  - About 40 percent of the Bahraini nationals labor force is employed by the public sector.
  - Nationals attracted to public-sector employment by high public-sector wages and lower working hours, which set relatively high reservation wages for private-sector employment.
  - Non-nationals are employed mostly by the private sector and are generally paid lower wages than nationals in similar positions.
  - Despite high growth and public sector absorption, unemployment among nationals reached a high of 16 percent in 2006, largely due to skill mismatches and availability of cheaper expatriate labor.
- Fiscal and structural constraints:
  - Bahrain has limited fiscal resources; oil reserves are small relative to neighbors, limiting ability to employ nationals in the public sector.
  - Main long-term challenge: continue to diversify away from oil; need to upgrade domestic labor force for private sector productivity and innovation.
- Emphasis of Bahrain’s labor reform program:
  - Focuses on training and skill building of the Bahraini labor force.

*Source: JOBS AND GROWTH: SUPPLEMENT ON COUNTRY CASE STUDIES, September 27, 2013*

### 22.      The labor market reform initiative was launched in 2004 with the aim of improving job

### 22.      The labor market reform initiative was launched in 2004 with the aim of improving job

### Overview of the labor market reform initiative
- Launched in 2004 to improve job opportunities for nationals and facilitate mobility of non-nationals.
- Reforms were spearheaded by the Economic Development Board (EDB) tasked with promoting Bahrain’s Vision 2030.
- Reform elements included: the National Employment Project (a job-matching/placement program for unemployed nationals, which operated for 18 months), the Labor Market Regulatory Authority (LMRA), the Labor Fund (LF) “Tamkeen,” and the Unemployment Insurance Program.
- Bahrain requires a minimum “Bahrainization ratio,” under which the share of Bahraini nationals in the work force of various economic sectors must attain certain minima.

### Labor Fund (Tamkeen) functions and activities
- Provides training programs and support to enterprises to foster private sector development and employment.
- Administers training institutes for job seekers and employers.
- Supports small and medium-sized enterprises (SMEs) to improve productivity, including facilitating access to affordable loans from commercial banks by providing guarantees.
- Conducts industry and product exhibitions, and facilitates information flow between firms and customers and between job seekers and employers.
- Funding: levies on non-nationals’ salaries finance the Labor Fund program fully.
- Tamkeen costs averaged about 0.6 percent of GDP during the period 2006-12.

### Ministry of Labor programs and planned initiatives
- Current programs:
  - Training new graduates in basic skills to prepare them for employment.
  - Subsidizing part of private-sector wages paid to nationals in initial employment stages: BD 150–200 per month for two years.
  - Cooperating with the private sector on skill improvement programs and on-the-job training.
  - Specialized courses (lectures and hands-on training) for technical professions such as law and engineering.
  - Development of a national apprenticeship program modeled after Germany’s system.
- Initiatives in preparation:
  - Establishment of a skills assessment center to provide skill certificates for both Bahraini and expatriate workers.
  - Development of a market intelligence unit with the EDB to understand future market skill needs.
  - Developing occupational standards (for 125 occupations) to help develop training standards and inform skills assessment design and educational curriculum.

### Measures to increase female labor force participation
- Two initiatives created to incentivize enterprises to hire women nationals:
  - Provision of two non-national permits for each female national employee hired.
  - A job-sharing program that allows two female employees to work part-time by sharing one full-time position.

### Unemployment insurance and related provisions
- Unemployment insurance scheme is fully funded from employers’ and employees’ contributions, and levies on non-nationals.
- Unemployment insurance provides income for the unemployed (for 12 months), and for new entrants to the labor market (for six months).
- All beneficiaries are required to join a training and placement program.

### Outcomes and key statistics
- Unemployment rate fell from a high of 16 percent in 2006 to below 4 percent by end-2012.
- Rate of growth of nationals’ public sector employment slowed from 5 percent during 2002–06 to 2 percent in 2007–12.
- Highest growth in nationals’ private sector employment was in trade (which includes the hospitality sector), followed by finance.
- Number of women nationals in sectors such as retail has been on the rise in recent years.
- In 2009, Bahrain became the first GCC country to end the sponsorship system for foreign workers, allowing workers to move jobs without the permission of their employer.

### IMF staff involvement and recommendations
- Staff welcomed the reforms and the emphasis on vocational training, social insurance for SMEs, and consultation with unions and the business community.
- Initial staff recommendations:
  - Ensure the unemployment insurance plan is fully funded to avoid drains on the budget.
  - Use price-based interventions instead of sectoral quotas for Bahrainis.
  - Caution against quickly increasing the cost of expatriate labor to avoid adverse impacts on competitiveness.
- Recent staff advice:
  - Advise Bahrain (and GCC countries more generally) to avoid public sector wage premia.
  - Authorities generally agree in principle but cite political pressures as reasons for public sector wage increases.

*Prepared by May Khamis and Harold Zavarce (MCD).*

### 42.      The German labor market has gone through a salient transformation in the last

### The German labor market has gone through a salient transformation in the last decade

### Historical context and pre-reform problems
- From 1970 to 2005 there was a secular increase in unemployment rates in Germany, only partially interrupted but not reversed by cyclical trends.
- The labor market was characterized by the prevalence of long-term unemployment and low job creation.
- Key interlinked root causes:
  - High reservation wages (due to high and long unemployment benefits) reduced incentives for labor supply and job search.
  - High reservation wages combined with high firing costs and rigid wage determination mechanisms discouraged job creation.

### Hartz I–IV reforms (approved 2002–03; implemented gradually)
- Reforms broadly grouped into three sets by goal:
  - Incentivize job creation by reducing firing costs:
    - Hartz I: significantly deregulated the temporary work sector, giving individual employers flexibility to vary employment through temp workers without incurring hiring or firing costs.
    - Hartz II: increased the threshold size for firms subject to layoff rules, from five to ten workers.
  - Increase incentives for labor supply and job search:
    - Hartz IV: considerably reduced the size and duration of unemployment benefits and made them conditional on tighter sets of rules for job search and acceptance.
    - Hartz II: introduced so-called mini-jobs, or part-time forms of employment involving monthly income of less than 400 EUR monthly which were exempt from most social security taxes.
  - Improve matching, training, and activation:
    - Hartz III: restructured the Federal labor agency and sought to improve training and matching efficiency of job searchers.
- Systemic positioning:
  - The Hartz reforms moved Germany closer to the Nordic system of “flexicurity” with medium to high level of employment protection, generous but conditional unemployment benefits, and strong active labor market policies facilitating labor reallocation (micro flexibility).
  - Compared to the Nordic model, the German model provides less protection and has more decentralized bargaining systems.

### Effects on core jobs and macro-flexibility
- Reforms of marginal (low-wage/temporary) jobs induced non-legislative changes in the core labor market (high-paid protected jobs), creating a second tier of employment and competition in regular employment.
- Firms and unions increasingly introduced flexibility into collectively bargained arrangements, notably:
  - Gradual adoption of work-time accounts, enabling reduction of working hours or pay in exchange for avoiding layoffs.
  - Enhanced use of short-time subsidies (kurzarbeit) during the crisis, facilitating work-time reductions by partially compensating workers for part of their lost income.
- These mechanisms increased macro flexibility and helped firms reduce hours instead of dismissing workers during the crisis.

### Employment outcomes and measured impacts
- Broad agreement that the Hartz reforms increased employment, possibly with a lag, and gains continued through the recession.
- Long-term unemployment rate is now 40% lower than its pre-reform peak.
- The reforms are estimated to have reduced the equilibrium unemployment rates by about 1.2 percent.
- Positive reform outcomes were complemented by a favorable global macroeconomic environment in the pre-crisis boom.

### Distributional effects and inequality
- The impact of reforms on inequality is less clear:
  - Increased labor participation of low-skilled workers may have contributed to observed increases in income inequality, but disentangling this from the global rise in inequality is difficult.
  - Initially, the number of part-time jobs increased; since then part-time jobs have stabilized and full-time employment growth has picked up, potentially dampening inequality effects.

### Remaining challenges and policy recommendations
- Maintain and enhance training and activation policies to:
  - Integrate disadvantaged groups and the remaining long-term unemployed.
  - Support upward mobility of temporary workers and the marginally employed.
- Address fiscal and tax disincentives for part-timers:
  - Part-timers face steep tax-wedges to increase hours worked, which encourages persistence of marginal employment rather than serving as stepping stones to full-time employment.
  - Removing fiscal disincentives and providing training can help mitigate risks of persistent marginal employment.

*Source: _092713 - 42.      The German labor market has gone through a salient transformation in the last*

### 60.      Haiti is one of the poorest countries in the world. GDP per capita in 2011 was about

### Haiti is one of the poorest countries in the world.

### Poverty, macroeconomic context, and labor market
- GDP per capita in 2011 was about $1000 USD on a PPP basis, which represents a decline of 25 percent from twenty years ago.
- Almost 80 percent of the population lives in extreme poverty.
- Inequality is very high, with a Gini coefficient based on market income of 59.2.
- Haiti’s poverty reflects its difficult history, periods of macroeconomic mismanagement, poor infrastructure, and an unfavorable business environment.
- Political instability, deep domestic institutional and structural weaknesses, and frequent natural disasters (including the massive 2010 earthquake) compound these challenges.
- Employment is low, concentrated in small business and in the informal sector.

### Role of fiscal policy for growth and inclusion
- Fiscal policy can promote strong and inclusive growth by:
  - creating favorable conditions for growth through macroeconomic stability;
  - using revenue and spending components to promote higher living standards.
- Taxation and tax administration can enhance inclusive growth and investment by:
  - increasing revenue overall;
  - promoting private sector development;
  - reducing income inequality.
- Higher revenue mobilization is a key prerequisite for raising spending in a sustainable manner and thereby reinforcing growth and inclusion.
- In conjunction with structural reforms to improve the business environment, private sector development could be boosted through a business- and growth-friendly taxation with lower taxes on business and labor and higher taxes on property and consumption.
- A progressive taxation structure could help reduce or contain inequalities.
- Expenditure policies can stimulate economic activity through creation of infrastructure and encourage human capital formation and employability through higher spending on health and education.

### Domestic revenue, taxation structure, and constraints
- Domestic revenue stood at almost 13 percent of GDP in 2011.
- Haiti relies heavily on indirect taxation, particularly customs duties and a turnover tax that is applied on all levels of the production chain, posing a significant burden on business.
- The taxation structure:
  - reflects capacity constraints in administration and collection;
  - features a high level of tax expenditures;
  - does not reflect the needs and compliance challenges of large, medium, and small taxpayers.
- Haiti’s taxation structure is a constraint on the business environment (along with a cumbersome and uncertain regulatory and legal regime, low levels of access to finance, and infrastructure bottlenecks) and is not efficient in raising domestic revenue.
- Haiti’s highest income tax rate takes effect only at very high levels of income, resulting in only weak progressivity and perpetuating inequality.

### Revenue collection reforms under consideration
- Haiti plans to replace the turnover tax with a traditional VAT, which could reduce incentives to operate in the informal sector while potentially raising revenue overall.
- The authorities plan to complete a study on the adoption of a VAT by December 2013, and are drafting a VAT law supported by IMF technical assistance.
- Possible corporate tax reforms mentioned:
  - at present the tax on dividends must be added to the corporate income tax;
  - companies cannot deduct taxes on international income.
  - such reforms, as part of broader efforts to improve the business environment, could spur private sector development while raising revenue.
- A more progressive income tax system could also be considered.

### Public spending execution and social spending priorities
- Haiti has weak capacity for executing capital spending despite enormous infrastructure gaps.
- Weaknesses reflect:
  - fragmentation of the public investment program;
  - cumbersome project execution;
  - weak information and control systems.
- Recommended reforms to improve execution capacity:
  - define clear responsibility among government institutions;
  - enhance the control system;
  - boost the work of the unit of project executions;
  - promote a dynamic information system.
- Current expenditures should be reoriented more towards social spending, which are the lowest in the region.

*Prepared by Elva Bova (FAD) and Lawrence Norton (WHD).*

### 78.      The future. Turning Malaysia into a prosperous, inclusive nation will require continuous

### _092713 - 78.      The future. Turning Malaysia into a prosperous, inclusive nation will require continuous

### Malaysia — future challenges and reform priorities
- Continuous transformation of the economy and government is required to modernize institutions, infrastructure, and skills.
- The Malaysian authorities have identified reforms to:
  - improve institutions,
  - raise productivity,
  - improve the effectiveness of education,
  - enhance social insurance and protection.
- The minimum wage policy and other reforms being debated, including unemployment insurance, should help to insure workers from risk.
- Key remaining challenges:
  - public debt is relatively high,
  - the budget needs to reduce its reliance on oil and gas revenue,
  - public spending must be better targeted and made more equitable, including by reforming fuel subsidies.

### Mexico — labor market reforms (findings and expected effects)
- Context and need for reform:
  - With macroeconomic and financial stability well entrenched, a key challenge is implementing reforms to boost growth and employment generation.
  - Over the last four decades, labor regulations in Mexico remained among the most rigid in the OECD and emerging markets.
- Identified distortions in labor market law and practice:
  - Contracts were treated as almost permanent with little room for open-ended alternatives.
  - Restrictions on part-time work and nonstandard schedules; prohibition on hiring by the hour or on a trial basis.
  - Labor courts did not favor swift and predictable dispute resolution.
  - High severance pay requirements, particularly for short-term workers, raised employment costs.
  - These distortions reduced formal sector job creation, increased youth and female unemployment, slowed productivity growth, and contributed to a large informal sector.
  - About half of the Mexican labor force is employed in the unregulated informal sector.
- 2012 labor reform: main provisions and intended impacts
  - New contractual modalities and flexible labor contracts introduced to lower hiring costs and boost formal job creation:
    - trial and initial training contracts,
    - temporary employment contracts for specific projects or seasonal activities,
    - hourly pay contracts (provided pay is not below the equivalent of the minimum wage),
    - a new regulatory framework for outsourcing practices.
    - All these categories will accrue wages, social security and other benefits.
  - Streamlined dispute resolution and capped compensation for unjustified dismissals to one year of salary to provide judicial certainty and reduce separation costs.
  - Productivity and labor skills take precedence over seniority for promotion and filling vacancies; recognition of training and establishment of a National Committee for Productivity to foster labor quality and certification of labor skills.
  - Expansion of worker rights and social protection: adoption of the International Labor Organization concept of “decent work”; broadened non-discrimination clause to include ethnic origin, nationality, disability, age, religion, immigration status, health status, sexual preference and marital status; protections for people with disabilities; formal ban on child labor under 14 years of age.
  - Measures to improve inclusiveness and gender equality:
    - short-term and hourly contracts expected to ease part-time opportunities for young people and women,
    - ban on mandatory pregnancy tests and marital status questions in hiring,
    - explicit prohibition on asking a woman to resign because she becomes pregnant,
    - more flexibility in using legally mandated six weeks of required annual leave before and after giving birth,
    - more severe penalties for bullying and sexual harassment.
- Expected quantitative effects and estimates:
  - The central bank estimated the labor reform could add about 0.2 percent per year to potential growth.
  - Alcaraz et al (2013) estimate effects via increased formal job creation, shift from informal to formal employment, and higher labor productivity in the formal sector.
  - Introduction of a cap on back wages would reduce costs associated with employment termination, implying a reduction of approximately 20 percent in hiring barriers in the formal sector.
- Prior Fund position:
  - IMF (2010) stated that “...labor market reforms being discussed go in the right direction, but more action will be needed to increase flexibility”.
  - IMF (2011) noted that an expedition of reforms to enhance labor market efficiency would help create a more dynamic labor market, including among the young.
- Education reform linkage:
  - A 2013 education reform law seeks to create a professional system for evaluating, hiring, assigning and promoting teachers and reduce labor unions’ interference on access to teaching positions.
  - Improving education quality is intended to reduce the skills gap and help integrate more of the labor force into the formal sector.

### Namibia — inclusive growth, inequality, and policy recommendations
- Recent performance and challenges:
  - Despite progress since Independence in reducing inequality, Namibia remains among the countries with the highest levels of income inequality in the world.
  - Gini coefficient trajectory:
    - declined from 0.70 in 1993/94 to 0.60 in 2003/04,
    - declined only marginally to 0.59 in 2009/10.
  - Labor income is the main source of household income:
    - labor income constituted on average 72.3 percent of total income in Namibia,
    - 49.2 percent corresponding to wages and salaries,
    - 23.1 percent to income from subsistence farming.
  - Unemployment rate remains high at 34 percent (NIES 2009/10).
- Incidence of growth analysis:
  - Growth incidence curves estimated for periods 1993/94–2003/04 and 2003/04–2009/10 show:
    - Positive growth in real consumption per capita for all segments of the population over 1993–2010.
    - Growth was inclusive in both absolute and relative terms during 1993/94–2003/04: lower per capita income deciles registered higher growth rates than middle and upper deciles.
    - From 2003/04 to 2009/10 growth became more neutral across deciles: the growth incidence curve lost much of its slope and shifted downwards, so the poorest benefited less relative to earlier years.
    - The deceleration in mean and median growth rates of real consumption per capita is noticeable in the second period.
- Possible causes for reduced inclusiveness:
  - Weaker targeting or leakage of social programs,
  - Expansion of expenditure not targeted to the poor leading government expenditure to become less progressive.
- Policy recommendations to restore inclusive growth:
  - Rationalize and reallocate government expenditures (including tax expenditures) to increase progressiveness while keeping total spending constant.
  - Conduct a thorough analysis of the incidence of public expenditures and correct or eliminate social programs and public transfers that do not reach their intended beneficiaries.
  - Identify and eliminate potential pockets of inefficiencies.

*Source: _092713 - 78.      The future. Turning Malaysia into a prosperous, inclusive nation will require continuous*

### 95.      The second crucial element for increasing the inclusiveness of growth in Namibia is

### _092713 - 95.      The second crucial element for increasing the inclusiveness of growth in Namibia is

### Labor market as central to inclusive growth: determinants and diagnosis
- Labor is the main source of income in Namibia, and unemployment has remained very high.
- Recent work by Leigh and Flores (2012) shows that the high level of unemployment in the SACU region is attributable to structural rather than cyclical factors.
- Structural factors identified as accounting for most of the high level of unemployment in the region:
  - rapid wage growth above productivity increases
  - the existing skills mismatch
  - the wage policies in the public sector
- Note on measurement: the Gini coefficient referenced corresponds to income, while the growth incidence curve corresponds to consumption per capita.

### TIPEEG and active labor market interventions
- The government’s Targeted Intervention Initiative for Employment and Economic Growth (TIPEEG) is a temporary workfare program.
- IMF country team assessment:
  - TIPEEG might have medium-term benefits by allowing youths to enter the labor force and gain valuable job experience.
  - To maximize sustainable job creation potential, TIPEEG needs to be complemented with a skill development component.
- Policy implication: TIPEEG should be combined with policies addressing structural factors (wage dynamics, skills mismatch, public sector wage policy).

### Public sector employment and wage policy impacts
- Public sector employment facts:
  - The public sector employs a significant share of the employed population: 16 percent.
  - Government employees (including those working for state-owned enterprises) constitute about one out of every four salaried employees in Namibia.
- Analysis:
  - Because of the government’s size as an employer, government wage policies are likely to affect the functioning of the whole labor market.
- IMF country team advice to the government:
  - Take into account potential impacts of wage and employment decisions on private sector job creation.
  - Public wage increases should be in line with sustainable increases in labor productivity.

### Policy recommendations (summarized)
- Complement TIPEEG with a skill development component to enhance sustainable job creation.
- Address structural labor-market factors:
  - Align wage growth with productivity increases.
  - Reduce skills mismatches through targeted training and education interventions.
  - Reassess public sector wage policies to avoid adverse spillovers to private sector employment.
- Ensure public wage and employment decisions consider their effect on private sector job creation; restrict public wage increases to levels consistent with sustainable labor productivity growth.

*Source: Excerpt from IMF country team analysis on Namibia contained in the content unit provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_092713.pdf_