Why Is Tunisia’s Unemployment So High? Evidence From Policy Factors

IMF Working Papers, October 27, 2023

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Tunisia has one of the highest unemployment rates within the Middle East and Central Asia.
The paper examines the extent to which institutional factors explain Tunisia’s high unemployment levels and assesses unemployment cyclicality by analyzing determinants of labor market sensitivity to the output gap.
During the last decade the deterioration of institutional factors that affect labor demand explain:
- about a quarter of the unemployment rate increase in Tunisia, and
- Tunisia’s excess sensitivity of unemployment to the output gap.
The analysis links worsening institutional conditions to both higher unemployment levels and greater unemployment cyclicality.

Primary institutional and policy factors analyzed include:
- business environment and product market competition,
- labor market flexibility (including labor market regulations and employment protection),
- financial constraints,
- informality.
These factors affect labor demand and the responsiveness of unemployment to output fluctuations (Okun's coefficient / sensitivity to the output gap).

Improve the business environment and product market competition to support labor demand.
Increase labor market flexibility to reduce unemployment persistence and sensitivity to the output gap.
Reduce financial constraints that hinder firm entry, investment, and hiring.
Address informality to strengthen formal job creation and labor market functioning.