Blog Post

Youth unemployment: Common problem, different solutions?

Youth unemployment is a major obstacle to the Middle East and North Africa (MENA) region’s human and economic development. In this blog post, Uri Dadush and Maria Demertzis go into the factors behind the its surge.

By: , and Date: November 29, 2018 Topic: Global Economics & Governance

This blog post was prepared for the Rome MED – Mediterranean Dialogues report 2018. 

The Middle East and North Africa (MENA) region has some of the highest total and youth unemployment rates in the world, especially among women. Youth unemployment is especially worrisome because when it is so high, it can have lasting effects on lifetime employability through the depreciation of skills and can be the cause of political instability.

While the issue is common to most countries in the region, the factors behind it are not necessarily the same. Any policy recommendations, therefore, need to carefully account for country characteristics and the limits they may set.

A common set of problems?

Across the MENA region, the youth unemployment rate is high compared with countries at similar levels of income across the world. As Figure 1 demonstrates, perhaps with the exception of the highest income cohort, the level of youth unemployment is significantly higher than the rest of world.

Figure 1: Youth unemployment (% of total labour force ages 15-24): MENA income groups average vs world averages.

Source: Bruegel based WDI (modelled ILO estimates).

Figure 2: Youth unemployment per country, 2017 or latest available

Note: Bruegel based on WDI (modelled ILO estimates) red bars represent averages for each income group.

The youth unemployment problem in MENA is part of a more general problem of low labour participation rates and total unemployment. With the exception of the high-income Gulf countries, the total employment ratio in MENA is low compared to countries at similar levels of income, lower by some 15 percentage points.

There is also a high variation within the high-income MENA countries, with the United Arab Emirates and Qatar having the highest ratios of employment to total population, while Oman and Saudi Arabia are characterised by the lowest ratios. The employment-population ratio of Oman is lower than the average of lower middle-income countries.

Figure 3: Employment to total population ratio: MENA income groups average vs world averages.

Source: Bruegel based on WDI (modelled ILO estimates).

In discussing the youth unemployment problem in MENA, there is a tendency to lump the countries in the region together. However, it is important to recognise that one cannot speak of a common set of factors that accounts for the jobs problem across the Middle East and North Africa region. The countries at war – Syria, Yemen, Libya – are, of course, a story in themselves. Some countries not at war, notably Lebanon and Jordan, have seen huge inflows of refugees that have created large downward pressures on wages, especially in the low-skilled informal sector.[1]

The remaining countries can be divided into two main groups. The energy importers such as Egypt, Morocco, and Tunisia have been unable to create sufficient jobs, especially for the young, and are the source of large diasporas. Officially, emigrants are 4-8%[2] of the population, but this figure would probably double if undocumented emigrants and their offspring born abroad are included.

In contrast, the energy exporters such as Saudi Arabia have generated jobs in excess of their effective labour supply, have little emigration, and have attracted foreign workers and their families that add up to 30% of the native population to the total. The United Arab Emirates and Qatar, oil exporters whose native population is much smaller than that of Saudi Arabia, have foreign-born populations that represent as much as 80% of the total.

Figure 4: Total unemployment (% of total labour force), youth unemployment (% of total labour force ages 15-24), net migration stock (100000 people), 2017

Sources: Bruegel based on WDI (modelled ILO estimates) and UN Population.

Note: total unemployment, youth unemployment and net migration stock are presented for the latest available year (2017). Net migration stock is calculated as a difference between the number of emigrants from specific MENA country and the number of immigrants to specific MENA country.

Despite the need for and existence of a large inflow of foreign workers, Saudi Arabia (and to a lesser degree the other Gulf countries) suffers from relatively high unemployment or underemployment among natives and exhibits low labour market participation rates among women and the young. But it is difficult to relate this phenomenon to low demand for labour. Other factors, such as high expectations, high government wages and a preference to work in government (i.e. to wait until a job in government opens up), as well as views on women, may be at play. Skill mismatch, reflecting inadequate education outcomes, may also be a major factor.

Among the elites, as well as among the population at large, the possibility of relying on rents and government sinecures may have reduced the incentive to work in the private sector. A recent IMF report[3] shows that there is a large government-to-private-sector wage gap in several MENA countries, with governments paying more for similar skills.

Algeria displays some of the labour market characteristics of energy importers even though it is in fact an energy exporter. It has relatively modest energy endowments compared to its large population, high youth unemployment as well as a large diaspora, and is home to almost no foreign-born workers.

A striking feature, common across the region, is the low participation of women in the labour force, documented most recently in the aforementioned IMF report. Though a separate analysis of this phenomenon lies beyond the scope of this exercise, it does underscore the importance of cultural and institutional factors in understanding job-market trends in MENA, and the difficulties that young women encounter in finding jobs compound the youth unemployment problem in much of the region.

Figure 5: Share of women in labour force (ratio to men), 2017.

Source: World Economic Forum, the Global Competitiveness Index dataset 2007-2017.

Note: Data on ratios for Libya (2017) and Syria (2017) is presented for the latest available years, 2014 and 2011 respectively.

Understanding the causes, seeking solutions

Unemployment is, as noted, a major obstacle to the region’s human and economic development. However, while the problem cuts across most of the countries in the region, its drivers and possible solutions differ. In other words, the issue is urgent across the region, but country-specific analyses are needed to identify the right solutions.

In seeking to understand the factors behind the surge in youth unemployment, there are undoubtedly both demand and supply factors that have contributed. Understanding which have been the main drivers of the employment outcomes we observe requires a careful examination of these factors individually. Demand factors include the rate of economic growth, but also its volatility. High and stable growth provides impetus for development as well as continuity, both of which are necessary for investment to be sustained. We observe that while growth rates in the MENA region can at times be high – and certainly are when compared to, for example, European countries – the volatility of growth is much higher. This inevitably weighs on the demand for labour and, in particular, young labour that is also subject to insider/outsider constraints.

On the supply side, the growth rates of the young population serve as a good proxy for capturing the supply of labour. Here we see important differences compared to other countries. MENA countries have typically higher shares of young population, the result of higher fertility rates in the past. As fertility rates catch up with European ones, these differences will also diminish. High income countries inside – but also outside – MENA do have lower and declining shares of young people. But there are also structural factors that affect youth unemployment, like labour market flexibility, that determine how easily demand for employment meets the supply of workers. Other factors that could account for high youth unemployment include: rigidity of labour markets, low economic growth rates, and rapid growth of the young population, which increases supply.

According to the Heritage Foundation Index of Labour Market Freedom,[4] the Gulf countries’ labour markets are among the most flexible in their income group, while those in the middle-income group are among those comparatively less flexible, with Algeria and Morocco standing out as especially inflexible. However, it should be noted that these statistics reflect local laws and regulations, while in fact most MENA countries exhibit a higher degree of informality. So, these statistics help understand only one part of the labour market, and the overall labour market is arguably more flexible than those figures suggest.

In light of the many country-specific factors at play, including institutional and cultural influences, that affect youth unemployment across the world, capturing the drivers of youth unemployment in economic terms would not be easy, nor would it be sufficient. This is especially true for developing countries, which are characterised by higher levels of informality and underemployment, so that youth unemployment statistics for those countries provide only a very partial view.

The level and persistence of youth unemployment in the MENA region for at least the last 20 years has had a very high societal as well as economic cost. As long as generations of young people fail to enter the labour market their skills will depreciate, pushing them towards external income support, and the economies of those countries will also fail to pick up.

But more importantly the social instability that youth unemployment brings can become a very serious destabilising factor, and a threat to more than just economic prosperity. Those countries need to understand the reasons behind their inability to integrate young people in the economy, design solutions that can properly function within each country’s structure, and adopt appropriate measures with the utmost urgency.

[1]  U. Dadush, M. Niebuhr, The economic impact of forced migration, OCP Policy Center, Research Paper no. 1605, April 2016.

[2] Most of the data used in this article comes from World Development Indicators, World Bank, https://data.worldbank.org/products/wdi

[3] B. Baduel, C. Castellanos, H. Finger, K., Ongley, G. Pierre, C. Purfield, E. Roos, V. Stepanyan, “Opportunity for All: Promoting Growth and Inclusiveness in the Middle East and North Africa”, International Monetary Fund, 2018.

[4]The Labor Market Freedom Index is an index of economic freedom published by The Heritage Foundation. It is a quantitative indicator that accounts for various aspects of the legal and regulatory framework of a country’s labor market based on data collected in connection with the World Bank’s Doing Business index. In particular, the index is comprised of the following six equally weighted factors:

  • Ratio of minimum wage to average value-added per worker
  • Hindrance to hiring additional workers
  • Rigidity of hours
  • Difficulty of firing redundant employees
  • Legally mandated notice period
  • Mandatory severance pay.

 


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