72469 Jobs for Shared Prosperity Time for Action in the Middle East and North Africa EXECUTIVE SUMMARY Jobs are crucial for individual well-being. They provide a livelihood and, equally important, a sense of dignity. They are also crucial for collective well-being and economic growth. However, the rules and the incentives that govern labor markets in MENA countries have led to inefficient and inequitable outcomes on the personal and collective standpoint. Several underlying distortions prevent a more productive use of human capital and have led to a widespread sense of unfairness and exclusion, of which the Arab Spring was a powerful expression. The MENA region has a large pool of untapped highest social productivity. Gallup’s recent polls show human resources, with the world highest that the overwhelming majority of youth would unemployment rate among youth and the lowest rather work in the public sector. In this way, the female labor force participation. At the same time, incentives that workers face keep MENA labor desirable jobs - defined as high paying job or with markets in a low-productivity equilibrium: To increase social insurance coverage - are few: private the chances of securing a public sector job, young employment is overwhelmingly of low value added people choose higher education degrees that are not and the public sector still provides the majority of relevant to the private sector. Those who can afford it formal jobs. High wage differentials, low mobility, and then spend time queuing with the expectation of stark and persistent geographic differences in relatively high pay for low intrinsic productivity. In employment outcomes underscore the inefficiency light of the fiscal constraints that countries are facing with which labor markets in MENA allocate human and the rising share of highly educated individuals, capital. Moreover, access to desirable jobs is this model of labor market success is unsustainable. predominantly tied to circumstances beyond individual control, such as gender, location at birth, Many barriers contribute to this equilibrium. The and parental education rather than individual effort. process of creative destruction, which led to These inefficiencies and inequities are exacerbated by technological upgrading in fast-growing East Asian the fact that some of the most coveted jobs, such as and Eastern European economies, is limited in MENA’s those in the public sector, provide high individual private sector. Few well established firms operate in a returns, but are not necessarily associated with the regime of privilege and limited competition, while 1 Preliminary Draft for Discussion. Executive Summary young and small and medium enterprises struggle to determining hiring and can further promote the grow or gain access to markets. Moreover, energy inequitable distribution of job opportunities. subsidies distort relative input prices, thereby promoting capital-intensive rather than labor- The Arab Spring and the increasing global intensive production. Discretionary enforcement of competition have shown that this fragile equilibrium regulation and constrained access to credit contribute cannot be sustained any longer – socially and to limit competition and dynamism in the private economically. The medium-run policy options that sector. As a result of these factors, job creation has can address the structural employment challenge in not been sufficient to keep up – in numbers and in the region are linked by the common thread of quality – with the demographic pressure from new breaking privilege to foster an inclusive economic and labor market entrants, nor with the expectations of employment growth process. increasingly educated youth. In the private sector, it will be essential to create a level playing field for firms to compete and grow and Existing labor market regulations reinforce the status also to enact reforms that improve access to credit quo. In some countries, wage floors and rigid and remove the current distortions in relative input employment protection generate incentives for firms prices. More moderate employment protection to operate informally, limiting their opportunities to legislation, accompanied by a system of income grow. Moreover, the employment package offered by support for displaced workers, could promote more the public sector creates important distortions: with dynamic labor markets. A realignment of the generally good salaries, benefits, and job security it parameters of public sector employment will likely outcompetes the private sector in attracting qualified reduce public-private dualism. Finally, pension reform workers. will be needed to address the current fiscal With no feedback mechanisms from firms and a unsustainability of these systems and to make legacy of state-led industrialization, the main focus coverage extension affordable. Producing the skill set of education systems continues to be the production necessary to sustain this new dynamic economy will of future employees for the public sector. While the require better governance, including more systematic MENA region has the highest percentage of firms in measurement of results and increased involvement of the world complaining of inadequate skills, the relevant stakeholders. incentive for education and training systems to Most of these policy recommendations are well cultivate relevant skills and competencies are muted. known and broadly shared. This begs the question: Moreover, a rigid tracking system and restrictive Why have these reforms not happen yet? What could university admission policies promote a logic of finally trigger the reform process? selection — manifested in rigid tracking in secondary education and high-stakes examinations — rather MENA countries face a complex legacy. Pre-Arab than of quality of education. This is reflected in Spring, governments tended to rely on a system of MENA’s disappointing performance in international rent sharing among constituencies of support from a assessments such as PISA and TIMSS when compared relative minority, as well as on universal subsidies of with countries with similar GDP levels. When formal basic consumption goods. There were many aspects skills are of limited value, other factors - such as to this equilibrium: (i) public employment responded personal networks - become more prominent in to the demand for guaranteed secure jobs by middle 2 Preliminary Draft for Discussion. Free to Prosper – Jobs in the Middle East and North Africa and upper classes; (ii) access to credit was A number of processes could trigger and support the concentrated on an extremely small set of well- political economy of reform. By investing in early connected firms; (iii) restrictions on the right of credible and measurable gains, governments in MENA association strongly limited the role for civil society could consolidate their credibility and set the stage organizations; (iv) and lack of access to data for game-changing reforms to come. Short-term prevented an informed dialogue within the polity. interventions that can have important, albeit transitory, impacts on jobs include well-evaluated The powerful demand for democracy and voice of programs to improve youth employability, as well as the Arab Spring carries unprecedented opportunities labor intensive public works. Implementing reforms to to break this system of privilege and move towards a improve access to credit would reduce one of the new and more inclusive model of development. biggest constraints to growth and job creation for However, it also carries challenges – governments are small and medium firms and also endogenously under tremendous pressure to deliver results rapidly, promote a broader private sector constituency for which might push them towards populist, fiscally reform. However, without transparent information costly measures that continue to reinforce current and a truly inclusive social dialogue, it will be hard for divides. Long time outsiders might see the current the region to live up to its great potential and to come political transformation as the opportunity to finally to a shared view on the merits of reforms. Following become the new insiders, thus generating a mere the examples set by other regions this process will alternation of elites. Moreover, there is evidence that require investing in data openness, and leveraging the it is difficult for new governments to embrace new social forces, including a new and more ambitious reform agendas, something that could be representative role for trade unions, employers’ particularly daunting in the midst of the current drop associations, and civil society. in growth and fiscal revenues. And, if not now, when? 3 Preliminary Draft for Discussion.