Youth Unemployment in the MENA Region: Determinants and Challenges

IMF News, June 13, 2012

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Unemployment in the MENA region is the highest in the world; youth (ages 15 to 24) share of total unemployment at least doubles the total rate.
Youth unemployment rate in the MENA region is about 25%, reaching up to about 30% in Tunisia.
In 2011, unemployment increased in MENA countries, with the largest increases in Tunisia (about 7 percentage points) and Egypt (about 3.5 percentage points).
Unemployment tends to increase with schooling; exceeds 15% for those with tertiary education in Egypt, Jordan and Tunisia.
Youth unemployment in most MENA countries appears driven by waiting for the right job, leading to longer unemployment spells—especially for educated youth—harming human capital accumulation.

High labour force growth, skill mismatches, labour and product market rigidities, large public sectors, and high reservation wages are identified as principal drivers.

Demographic Transition
- Over the past decade, the labour force in MENA has grown at an average annual rate of 2.7%, faster than any other region except Africa.
- Approximately 10.7 million new entrants are expected to join the labour force in the coming decade, compared with 10.2 million in the previous decade.
- Youth labour force growth is expected to gradually decelerate over the next decade; in some countries (e.g., Tunisia) the demographic transition will occur earlier.

Skill Mismatches
- Average years of schooling (15+) increased four-fold between 1960 and 2000; in 1999 average years of schooling in MENA was 5.3 years.
- In 1999, MENA was ahead of South Asia (4.6 years) and Sub-Saharan Africa (3.5 years), and one year behind East Asia (6.6 years) and Latin America and the Caribbean (6.4 years).
- MENA still lags on illiteracy rates; entrepreneurs cite lack of suitable skills as a key hiring constraint.
- Unemployment rates are highest among the most educated, indicating education systems fail to produce needed skills.

Labour Market Rigidities
- Hiring and firing regulations in most MENA countries are more restrictive than in the average emerging and developing country (Global Competitiveness Report 2011-2012).
- Enterprise surveys show the percentage of firms identifying labour regulation as a major constraint is, on average, greatest in MENA.
- Indicators of labour market flexibility show rigidities are particularly high in MENA and could limit employment creation, especially for first-time job seekers.

High Reservation Wages
- Public sector wages are 48% and 36% higher than private sector wages in Egypt and Tunisia, respectively.
- Greater job security, higher wages, and more generous on-wage benefits in the public sector have inflated wage expectations and encouraged job search toward public employment.
- Generous childcare and maternity leave policies further encourage females to focus on public sector jobs, reinforcing a dual labour market.

To absorb unemployed and new entrants, MENA oil importers need to increase employment by an estimated 18.5 million full-time positions over the next decade.
- Note: the number of new jobs to be created is significantly larger for the entire MENA region.
Achieving the job target requires a combination of permanently higher economic growth and reforms to improve labour market responsiveness.
Higher growth alone is necessary but not sufficient; without structural reforms, higher economic growth is likely to have only a modest impact on youth unemployment.
Recommended structural policy areas:
- Improve labour market flexibility; reduce search and hiring costs to facilitate integration of young outsider workers.
- Improve the business climate and foster product market competition to reduce barriers to entry, curb incumbents’ rents, reduce wage claims, and raise potential growth.
- Address skill mismatches by realigning curricula with private-sector needs, reforming university admission policies, and improving educational quality.
- Improve public-sector hiring and compensation: emphasize skills and competition over paper qualifications; strengthen links between compensation and performance; implement merit-based promotion.
- Reduce the size of the public sector, which can crowd out private investment, reduce private sector size, and involve higher taxes that depress aggregate demand.

Turn infrastructure investment into employment generation
- Evidence from Latin America and the Caribbean: about 40,000 annual direct and indirect new jobs can be created in the short term for every US$1 billion spent on infrastructure.
- Extrapolation: 1% of GDP spent on infrastructure could generate in the short term as many as 87,000 new jobs in Egypt and 18,000 jobs in Tunisia.
- Policymakers can bring forward viable labour-intensive infrastructure projects already in the pipeline while maintaining fiscal sustainability.

Support private-sector activity through macro policies
- Explore tax incentives or credit guarantees for viable labour-intensive small and medium enterprises.
- Remove impediments to access to credit to help enterprises.

Scale up promising training programmes based on past successes
- The Education For Employment Foundation (EFE) operates in Egypt, Jordan, Morocco and other countries; works with corporations to assess demand and provide tailored training.
- EFE outcomes: 85% of programme graduates were placed in jobs in Jordan; 86% were placed in jobs and internships in Morocco.
- Policymakers should scale up and replicate such programmes.

Introduce new well-designed and effective training programmes
- Lessons from Latin America: demand-driven, on-the-job, hard- and soft-skill focused, performance-monitored and impact-evaluated programmes have significant positive impacts on employment and earnings.
- Caution: short-term measures should not harm long-term sustainable job creation or productive skill formation (e.g., creating unneeded public-sector jobs or diploma-based subsidies can reinforce mismatches).

The key objective: turn the large and growing labour force into an asset rather than a constraint.
Requires:
- Sustained, high, and job-intensive growth.
- Refocusing education and training to reduce skills mismatches.
- Enhancing labour market flexibility.
- Maintaining macroeconomic stability.

Source: Youth Unemployment in the MENA Region: Determinants and Challenges by Masood Ahmed, Dominique Guillaume, and Davide Furceri; June 13, 2012.