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Why Jobless? The Growth Pattern

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Oct 04, 2012 / 0 Comments

 

This blog is part of a weekly series that we hope will provide some food for thought on the critical questions outlined in the forthcoming MENA Flagship Report on Jobs.

 

High unemployment in the Middle East and North Africa (MENA) largely reflects the growth deficit.  While China has been growing at 10 percent for a decade and has unemployment below 5 percent—MENA is the mirror image, growing at 5 percent and suffering unemployment above 10 percent.

 

The absence of strong growth in MENA has been a serious constraint to employment. It's worth noting though that MENA’s employment situation is not accurately described by the jobless growth that has plagued much of the industrial world in recent years. Rather it largely is a result of insufficient growth. In fact, the response of job growth to income growth in MENA is in general relatively high.

 

One issue is that MENA’s labor force is growing rapidly, so in order to employ all the new young jobseekers, growth would have to be much higher or the employment response to growth would have to be well above average.

 

How can this happen?  Growth could be higher if resources were used more effectively. Employment’s response to growth could increase if there were relatively greater incentives for growth in employment creating sectors.  A number of opportunities to stimulate growth and employment are underscored in the forthcoming MENA jobs report.  My three top choices (going beyond standard ingredients, such as the need for macro stability) are:

 

Remove input price distortions.  Energy and labor are both inputs into production.  The high energy subsidies prevailing in many countries imply that energy is a relatively cheaper input than it is elsewhere in the world, and that firms may prefer to use subsidized energy in place of taxed workers.  This leads countries to specialize in sectors and production processes that are relatively energy intensive.  Such subsidies are therefore a major distortion in countries rich in human resources: they retard growth by using resources inefficiently while limiting the labor response to growth.

 

Incentivize the private sector.  Despite being low productivity, the public sector is still the main employer in MENA, with the private formal sector accounting for a paltry 10 percent of employment on average.  This sucks resources out of their most productive uses, retarding growth and employment creation.  Fast growing young private firms and large enterprises are typically the big job creators in an economy.  But growth in these firms is constrained in MENA by a weak business climate coupled with incentives for jobseekers to prefer public sector.

 

Manufacture more. Employment elasticities of manufacturing are much higher than of resource extraction and a large body of literature finds that growth accelerations are accompanied by manufacturing surges.  In other words, manufacturing creates both jobs and growth. In MENA, however, manufacturing contributes less than 10 percent to value added growth, with natural resources above 20 percent on average.  This compares poorly to the 15-25 percent for manufacturing and less than 10 percent for natural resources in countries like Turkey, Malaysia, and Indonesia.  In addition to private sector growth highlighted above, manufacturing requires a competitive exchange rate and openness to trade and foreign investment that has for the most part been absent in the region.

 

Growth and employment creation in MENA are about channeling the tremendous wealth in human resources into productive uses.  Labor policies alone will therefore do little to solve the unemployment problem because a number of other distortions prevent workers from being employed efficiently.  Incentivizing labor-intensive private sector employment—as opposed to current incentives which encourage excessive fuel use and public sector employment—is fundamental.

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This blog is part of a weekly series that we hope will provide some food for thought on the critical questions outlined in the forthcoming MENA Flagship Report on Jobs. The common thread and objective of these blogs are to spur a conversation on “what to tell your Finance Minister.” This is in preparation for the World Bank Annual Meetings in October 2012, where the report's main messages and the results of the live chat will be presented to MENA policy makers. We want to know what YOU think is holding people back, and what can be done to create more and better jobs in MENA. Please send us your thoughts and join us for a live web chat on jobs on September 17.

 

Read the previous weeks' blogs in the series:

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