62233 April 2011 · Number 84 KEY CHARACTERISTICS OF EMPLOYMENT REGULATIONS IN THE MIDDLE EAST AND NORTH AFRICA Diego F. Angel-Urdinola and Arvo Kuddo 1 Africa (MENA) region are lagging according to international benchmarks. Labor market Introduction: This Fast Brief provides a general outcomes are a primary concern for background on the main features of labor policymakers in the region. Employment rates regulations in the Middle East and North Africa in MENA are low by international benchmarks (MENA) Region. This is part of an effort to - 46 percent vs. a world average of 60.3 percent understand employability constraints in MENA in 2008. This is mainly due to very low and to this end a World Bank team gathered employment and labor force participation rates information on labor legislation and other legal among women. Unemployment rates are also acts concerning labor regulations in the region. high, at 10 percent vs. a world average of 6 All this rendered more urgent with the ongoing percent in 2008, largely due to high rates of social and political turmoil in the region. unemployment among youth (new and often Within the broader scope of labor regulations, educated entrants to the labor market) and and in order to assure regional comparability, women. Arab Mediterranean Countries the information that was collected focused on (AMCs) display a very large youth with a key issues associated with commencing or consequent need to create more than 1,500,000 terminating employment and during the period additional jobs per year over the next 10 years of employment (including maternity benefits). in order to provide employment opportunities The main sources of the data are the World for new labor market entrants and to keep the Bank’s Doing Business 20102 and the (already very high) number of unemployed International Labor Organization (ILO) unchanged (Angel-Urdinola and Kuddo, 2010). databank3. This Brief is to provide Doing so will require rates of economic growth policymakers and international organizations surpassing those achieved in recent years – a with a regional analysis of how labor regulation rather challenging task given the current global affects labor market outcomes in the region and and regional economic context. Gulf to inform governments on strategic approaches Corporation Council (GCC) countries, remain to employment creation through labor policy highly dependent on oil-related revenues and and associated reforms. This activity comes as a face challenges due to migration inflows, a response to regional priorities in the context of public sector that cannot create jobs at the pace the Arab World Initiative (AWI): one of the six of labor supply, and low quality job creation strategic themes of the AWI focuses explicitly that is not attractive for their nationals. on employment creation as a top priority. Labor Regulations and Restrictions on Labor Market Indicators in MENA: Labor Employment: Labor regulation, among other market indicators in the Middle East and North factors, introduces restrictions to employability in MENA. Data from enterprise surveys4 indicate that in some MENA countries labor regulation 1 Angel Diego Urdinola, MNSHD; Arvo Kuddo, HDNSP. is perceived as an important constraint to This Fast Brief was cleared by MNSHD Social Protection business environments and therefore to Sector Manager Roberta Gatti. 2 www.doingbusiness.com 3 www.ilo.org/travaildatabase 4 www.enterprisesurveys.org employment creation. In Egypt, Lebanon, independence era. Each MENA country has its Oman, and Syria, labor regulations are own history of labor law development, with perceived by firms as a major constraint. This is differing labor market conditions and true to a lesser extent in Algeria, Jordan, contrasting legal and social security systems. Morocco, and West Bank and Gaza. In Egypt, Specific core attributes of the social contract in according to the 2008 Investment Climate MENA traditionally include a preference for Assessment (ICA) survey, labor regulations and redistribution and equity in economic and mandatory contributions continue to constrain social policy; a preference for the public sector many enterprises from expanding formal over markets in managing national economies; employment. Manufacturing firms, service reliance on state planning in determining firms, and hotels in Egypt report they would economic priorities; and an encompassing hire a net of 21 percent, 9 percent, and 15 vision on the role of the state in the provision of percent more workers respectively if there were welfare and social services. In many MENA no restrictions to hiring and firing workers countries, labor laws are quite dated – Bahrain (Angel-Urdinola et al 2010). In the Lebanon 1976, Kuwait 1964, and Lebanon 1964. 2009 ICA, almost all firms indicated that they Increased exposure to the global market has would hire an average of more than one third had an impact on labor relations in the MENA of their current workforce in the absence of region and countries such as Egypt, Syria, existing regulations and restrictions. On the Morocco, Jordan, Oman, South Arabia, and other side of the spectrum, labor regulations in West Bank Gaza have recently revised their GCC countries are very flexible and thus not labor codes to better adapt to international seen as an important constraint to business trade, enhance labor mobility, and better attract climate or employment creation. foreign direct investment. Labor regulations not only protect workers’ rights, Workers’ Rights and Labor Legislation: In but also determine, to some extent, the flexibility of most MENA countries, labor regulation constitutes the labor market. Labor legislation – broadly a principal mechanism to protect workers’ rights as speaking – regulates interactions between collective bargaining is not widespread. Depending employers, employees, and between their on the country, trade unions in MENA whether representative organizations: unions and state-controlled or independent, rarely employers’ associations. Besides regulating represent workers effectively. There are employment relationships between employers exceptions, like Tunisia where unions are and employees, labor law serves as a influential social partners. Unionized MENA mechanism to establish a more conducive countries generally have a single, often environment for the creation of productive compulsory, trade-union structure. In many employment opportunities and for the countries, strikes remain illegal and workers enhancement of social dialogue. International have few ways of challenging the power of the experience confirms that, among many other state or private employers. In this context, the factors, labor regulations constitute an role of the main labor law as safeguard for important cornerstone for a favorable workers is much more essential than, for investment climate, which in turn, is a key example, in OECD countries where the majority determinant of foreign direct investment flows of workers are covered by collective and employment creation in the labor market arrangements. Countries with higher levels of (particularly affecting youth and women). collective bargaining generally rely on flexible Despite a considerable stock of literature on employment protection legislation (EPL), thus labor regulation and its effect on labor market providing a greater role for trade unions and outcomes, there is little systematic analysis of employers associations in determining these topics in the MENA region. employment relations. Most MENA countries, however, are far from this concept, which Evolution of Labor Legislation in the MENA partly explains why labor codes tend to include Region: In many MENA countries, labor over-protective regulation, especially on the legislation is shaped by specific features of the firing of workers. social contract established in the post April 2011 · Number 84 · 2 worker, are high in most countries in the Hiring and Firing: Hiring regulations in MENA region. Protective firing regulation is partially are generally aligned to international standards. explained by the lack of unemployment MENA countries in general do not display insurance schemes in most MENA countries. strict hiring regulations as compared to Compliance: Despite protective regulation, most international standards, although some do. workers in MENA remain largely unprotected Most MENA countries have quite flexible against unemployment risks. Even though labor arrangements in their labor laws as far as fixed legislation in MENA is rigid de jure, de facto, it term labor contracts are concerned. Many is widely evaded. Employment protection in workers in MENA work overtime to earn extra many MENA countries only applies to elite income, but overtime arrangements are often workers in the public and private sectors. As abused by employers as provisions such as such, despite the existence of rigid/protective wage premiums for night work and overtime labor laws, labor markets in MENA remain are often bypassed to the benefit of the largely unregulated and thus quite flexible in employer. In terms of annual leave, regulations practice. There are two important factors in most MENA countries are rather generous contributing to this: by international benchmarks - partly explained by the benefit packages offered to public (a) Labor legislation primarily affects hired servants. Most MENA countries offer some employment in the formal sector: The typical form of maternity protection; but benefits are country in MENA produces about 27 percent of not generous by international standards. An its GDP and employs 67 percent of its labor important aspect of maternity leave provisions force informally (Loayza and Wada, 2009). As is who bears the costs. In most MENA such, the application of the labor law in many countries, it is the employer who has to cover cases is limited to the civil service, public direct and indirect costs. Therefore an extensive employment and a small number of private usage of such entitlements may lead to formal sector firms, many of which are restrictions in the hiring of potential mothers. multinationals. Especially in oil rich countries, In Algeria, Iraq, and Morocco, the cost of the share of foreign labor – often informal and maternity benefits are covered by the social thus less protected - is particularly high. security system. Although in such situations the employer does not bear direct costs for (b) Law enforcement remains weak in most maternity leave, it does cause inconveniences countries: While laws may be applied and associated with the need to find a replacement enforced differently in different countries, in for the female worker, or to secure a workplace many MENA countries, legal provisions are upon the worker’s return. often not complied with. Regulations designed to protect workers, such as the establishment of Firing Regulations in MENA: Compared to minimum wages and regulations for overnight international benchmarks, firing regulations in work are often bypassed for the benefit of the MENA are rather strict. Firing regulations in employer. Compliance with firing regulations MENA (and especially in non-GCC countries) (such as severance payments) is limited outside remain quite strict and firing costs remain high. the public sector as employers use various While the termination of workers due to practices to avoid payments, including forcing redundancy is legally authorized in all MENA workers to sign undated “voluntary” countries, most countries have complex resignations when starting a job. regulations that require notification, justification, and approval for dismissals. In Achieving greater labor market flexibility some countries, employers are even required to through the non-enforcement of laws is not an comply with stipulated obligations to reassign optimal choice because it undermines the rule and/or retrain workers after termination. of law, exposes firms to costly uncertainty, Furthermore, firing costs involving notice impedes formal employment growth and requirements, severance payments, and leaves workers without adequate protection penalties due when terminating a redundant (Rutkowski and Scarpetta, 2005). Many MENA April 2011 · Number 84 · 3 countries need to develop modern Labor unemployment insurance (UI) systems, namely, Inspectorates to effectively enforce core worker Algeria, Egypt, Iran, and Kuwait. Even in rights, to supervise the implementation of labor countries with UI systems in place – like Egypt regulations and to provide technical assistance – the system hardly exists. The factors and advisory services to enterprises. contributing to the low utilization are a lack of Furthermore, lack of public awareness of legal public awareness about UI benefits among plan rights associated with employment may also members, restrictive eligibility conditions, the impair the enforcement of the law in a number difficulty of and the stigma attached to of MENA countries. Workers need to be aware documenting a “just-cause” firing decision, and of their legal rights and should know how to low overall lay-off risks among covered open- enforce them. ended contract employees. Labor Legislation and Private Sector Reforming Labor Regulations: Reforms in labor Employment: At the same time, protective labor regulation in MENA must go hand in hand with regulation in MENA (especially concerning reforms in the social protection system. Adopting a worker’s dismissal) is hindering employment lifecycle approach to work may require shifting creation in the private sector. International from a focus on protecting particular jobs to a evidence suggests that stricter employment framework of support for employment security protection legislation (EPL) (i.e. including social support, unemployment requirements/cost of hiring and firing) is insurance, and active measures to assist associated with higher levels of informality and workers during periods of transition. As such, youth/female unemployment, as well as lower any reforms to EPL should be adopted in productivity and slow labor market adjustment parallel with reforms of other social protection after economic shocks. Also, strict EPL for policies that support laid-off workers and workers in the “formal” sector has generally workers in transition between jobs and other been shown to restrict employment growth. vulnerable groups to preserve social cohesion Many economists argue that stricter EPL leads and stability. Finally, any reform in EPL should to segmentation in the labor market between also consider the specificities of the political the so-called insiders (i.e. the workers with a economy in each country, institutional capacity, protected job) and the outsiders (i.e. people fiscal constraints, and policy preferences as set who are either unemployed or employed with in the social contract. Unions in MENA – some fixed-term, part-time or temporary contracts) of which still have strong political leverage – (Angel-Urdinola and Kuddo, 2010). In the case continue to favor the status-quo as defined by of MENA, in addition to high firing costs and the post-independence social contract, making strict dismissal requirements, regulation in labor reform a rather complex and far-reaching many countries (mainly non-GCC) include political process. provisions in the regulation that may make it more expensive for employers to hire women, Contact MNA K&L: such as generous maternity protection benefits Director, MNACS: Emmanuel Mbi and annual leave, especially if paid directly by the employer. Regional Knowledge and Learning Team: Omer Karasapan, Roby Fields, and Hafed Al- Policy Implications: Economic efficiency and Ghwell. worker protection could be achieved if governments Tel #: (202) 473 8177 MNA K&L Fast Briefs: set an overarching goal of “protecting the income of http://go.worldbank.org/OXADZV71I0 workers as opposed to protecting particular jobs” The MNA Fast Briefs are intended to summarize through, for instance, the expansion of lessons learned from MNA and other Bank unemployment insurance schemes. An Knowledge and Learning activities. The Briefs do appropriately designed unemployment not necessarily reflect the views of the World Bank, insurance scheme can provide adequate its board or its member countries. protection to workers in the context of a more flexible labor market. At the same time, only a few countries in the region have April 2011 · Number 84 · 4