62245 March 2011 . Number 35 THE LABOR MARKET POLICY REFORM AGENDA IN MENA MNSHD1 North Africa) is the lowest in the world. International experience indicates that getting Introduction: What is the problem? Despite women into jobs is associated with poverty positive economic growth in recent years, basic reduction, higher economic growth, and better labor market outcomes in the Middle East and governance. Higher levels of female North Africa (MENA) remained stagnant and employment allow government investments in have only improved slightly in the past 10 education to be used more efficiently as women years. A number of recent and ongoing use their acquired talents productively in the analyses have stressed the pressing need for economy. In countries with low levels of female many economies in the region to identify new employment, families often under-invest in and sustainable sources of growth, create more girl’s education with important externalities on and higher value-added employment, and children’s nutrition and education outcomes. absorb the fast growing number of university graduates into the labor market. Structural High Unemployment: Unemployment in transformation towards higher productivity MENA - 10.6% across the region2 - is higher and the creation of qualified jobs requires far- than in any other region in the world and is reaching reforms in multiple sectors, including particularly high among youth at 24.4% vs. 15% innovation, science and technology; education worldwide. In Tunisia and Egypt, quality; labor market flexibility and mobility; unemployment rates are highest among highly and entrepreneurial incentives allowing educated individuals, 17% in Egypt and 21% in investors to innovate, invest, and create higher Tunisia. However, in many countries low- value added jobs. Within this broad context, skilled individuals still compose the majority of this note focuses on labor market policies and all unemployed. In Tunisia, for example, the the agenda for labor market reform in MENA. majority of all the unemployed, around 71%, are individuals that have completed at most The Context - The Youth Bulge: In the short- primary education. Many of the unemployed run, labor markets in MENA will need to create population, especially youth, have been so for employment for a large youth bulge. In most long periods of time. The time-dimension of MENA countries the population share of 15 to unemployment is an important characteristic of 24 years-old accounts for 20 to 25% of the the labor market, as long-term unemployment overall population compared to 18 % globally. reduces individuals’ propensity to find Countries in North Africa will need to create employment - in Tunisia about one third of the over 1,500,000 additional jobs annually over the unemployed have been seeking for next 10 years just to keep the current employment for at least 12 months. proportion of unemployed unchanged. High Levels of Informality: To cope with Low Levels of Female Employment: Although scarce formal jobs, young-educated workers are increasing, Female labor force participation in opting to work in low-pay/low-productivity MENA (28% in the Middle East and 25.5% in jobs the informal sector. Having to rely on informal sector jobs constitutes an important 1 loss of human capital for young entrants as The Middle East and North Africa Region, Human Development Department. This Fast Brief was cleared by 2 Roberta Gatti, Sector Manager, MNSHD. The World Bank, World Development Indicators, 2010. returns to education (even among those with requirements, severance payments and university education) tend to be very low in the penalties due at termination, expressed in informal sector. Approximately 67 percent of weeks of salary account for 50 weeks of salary MENA’s labor force works in low-quality low- on average vs. 28 in ECA, and 27 among OECD productivity jobs with no pension countries. Labor taxes and mandatory health/unemployment insurance and producing contributions by businesses as a percentage of only 27 percent of regional GDP. Informal commercial profit are 25 percent in North employment, proxied by the share of the Africa vs. an average of 10 to 13 percent in EAP population without access to social security, is and LCR. rising rapidly, especially among the most educated segments of the population. In Egypt What is our Approach and Strategy? Our and in Tunisia, most net employment creation policy framework considers constraints in labor in recent years has occurred in the informal demand and supply, as well as the meeting of sector, largely in wholesale, construction, and the two (i.e. matching and intermediation) transport. through four policy pillars: Main constraints to Employment Creation: 1. Support Regulatory reforms and capacity Despite great improvements in recent years, building, with a focus on: private investment remains low in MENA • Make it easier for firms to hire people • Protecting workers in periods of transition (Private Investment as % of GDP is 15% in with a focus on unemployment insurance; Tunisia and 11% in Egypt vs. 32% and 28% in • Ensure that labor costs (taxes and wages) Malaysia and China). Skills mismatches remain are not too high as compared to an issue. Results from enterprise surveys productivity; indicate that firms identify worker skills and 2. Address the issue of skills: education among their top five constraints to • Train and re-train workers business climate in the region, especially in • Address skills mismatches North Africa - share of firms indicating labor • Ensuring high quality recognition of skills comes up as a major constraint to learning at all levels, enhancing flexibility, transparency and portability of education business creation – cited by 37% of businesses credentials for all students in North Africa vs. 24% In Latin America 3. Supporting Rapid Employment Creation: (LCR), 14% in Eastern Europe-Central Asia • Modernize public agencies that help (ECA), 6% in East Asia (EAP). workers and firms to get together • Foster coordination with private The relatively large public sector in the region intermediation agencies still distorts incentives. In many MENA • Prepare /help individuals to obtain countries, civil service remains large for its employment abroad levels of development. Since public sector jobs 4. Income Support: are still associated with relatively generous • Promote employment and provide income support through regional incentives, wage medical and retirement benefits, relatively subsidies, entrepreneurship programs, and short work hours, and transportation benefits, public works. many educated individuals (mainly women) still queue for public sector jobs. This Note that the labor market agenda phenomenon undermines entrepreneurship complements a private sector development among young educated workers and strategy focused on improving competitiveness contributes to long unemployment spells. In and the business environment. Egypt, Syria, Iraq, the public sector still account for 30, 27, and 37% of overall employment (vs. What have we done? Labor market and an average of 15 to 20% worldwide). institutional reform are politically sensitive. Yet, we have been able to further this agenda. Labor regulation remains rigid and labor taxes The region’s engagement in this area is remain high. Firing regulations in MENA composed of a diverse portfolio that includes remain quite strict and firing costs remain high. regional and country level dialogue (AAA In MENA, the cost of advance notice March 2010 · Number 35· 2 work3 and technical assistance) and a rapidly modernize and build the capacity of Labor growing operational pipeline. Ministries, public intermediation, and labor offices in Jordan, Syria, Egypt, and Tunisia. Regional AAA: The region leverages AAA and data generation work to produce solid Promoting Employment Creation and Income diagnostics and to build a constituency around Support: Workfare programs (Djibouti, Yemen) the need for reform. These include: and school-to-work-transition programs are The upcoming Regional Informality Report implemented to create and facilitate (FY11) and the cross-sectoral Employability employment opportunities for unskilled and Flagship Report will foster the regional skilled workers. dialogue on the needed reforms to promote employment creation. Workfare Programs: Workfare programs provide Regional dialogue on migration and social temporary employment for wages that are insurance portability – with a focus on lower than market wages. They comprise labor regional issues, including Tunisia, Egypt, intensive infrastructure works (construction, and the UAE. The goal is to establish maintenance, soil conservation, water mechanisms to identify demand for labor collection, and green public works). Workfare abroad and improve labor intermediation, programs are effective ways to rapidly increase and to better link migration and skill employment, provide income support in the development through training policies. short run, and through this, to achieve poverty reduction and promote social cohesion. Policy Dialogue and Lending to Support Regulatory Reform: MENA engages in multi- Yemen’s Social Fund for Development (SFD) year analytical work on labor markets, skills delivers community-driven projects in the supply, constraints to labor demand in private poorest and most remote areas of rural Yemen. sector, and social protection systems. In Tunisia In response to the recent food price crisis a and in Morocco this work has led to small Bank grant ($10M) initiated a Labor- Employment DPLs and to a broad scope DPL in Intensive Work (LIW) Program to provide Jordan supporting social security reform. emergency cash-for-work to households most Similar work is ongoing in Lebanon, Syria, and affected by the shock with 36,000 beneficiaries. Egypt, and is planned for Yemen. Also, the In Djibouti with support from a JSDF Bank works closely with counterparts on TA emergency window Grant ($4M), the Bank, in programs on qualifications frameworks for collaboration with the Japanese Social skills training. Development Agency designed and is implementing an innovative ‘workfare plus’ in Investment lending: The region uses urban areas. The program combines traditional investment lending to facilitate entry of higher cash-for-work with nutrition promotion to quality skills into the labor market with projects leverage the effect of the additional income on underway in Tunisia, Morocco, Yemen, the family's nutritional status. It targets poor Djibouti and Jordan. In Jordan the employer and vulnerable households with 0 to 2 years old driven Skills Development Project is aimed at children and/or pregnant women. realigning the design of Technical and Vocational Education and Training systems School to Work Transition Programs: School-to- with market needs. work transition programs are used to enhance employability and to promote job creation, Strengthening Governance and Social Service especially among new entrants to the labor Delivery: MENA is preparing a Regional market. The four main types of school to work Report on Labor Regulation, Active Labor transition programs are (i) employment Market Programs (ALMPs), and Public services, i.e. intermediation programs to match Employment Services. There are also ongoing new entrants with firms domestically and technical assistance engagement with clients to abroad, (ii) labor market training, (iii) wage subsidies, and (iv) self-employment promotion. 3 AAA: Analytical and Advisory Assistance March 2010 · Number 35· 3 Tunisia’s Reform of Active Labor Market Policies: labor regulations, promoting private The Tunisian Ministry of Vocational Education intermediation, revising social security systems, and Employment undertook a reform of the including tax wedges, social contributions and ALMP portfolio in 2009, based on analytical pensions. Also useful would be liberalization of work by the World Bank and supported by the professions and a shift from protecting first Employment DPL. The reform bundled particular jobs to a framework of protecting over 20 ALMPs into six programs, facilitating workers via social support, unemployment management and financial control. All ALMPs insurance, and active measures to assist during have small monthly income-assistance periods of transition. Other measures include components with strict eligibility rules for job- modernization of labor intermediation and seekers and employers. The number of new and public employment services through ongoing program contracts has increased investment operations and fee-for-services and markedly from 85,889 (2008) to 95,415 (2009) to working with Labor Ministries and Labor 138,674 in 2010. Offices to assess and monitor ongoing employment programs, reform ALMP systems, Entrepreneurship Promotion: A Business Plan and develop and design labor market Thesis Competition supported by the EDPL information systems. aims to improve students’ school-to-work transition by encouraging entrepreneurship Remaining challenges: In recent years and innovative thinking. The intervention governments in MENA have shown some provides an integrated package of reluctance to engage in projects/core reforms in entrepreneurship training and individual the social sectors. This partly occurs because coaching to university students in order to some of the needed reforms to improve the implement business ideas, developed as part of operation of the labor market are politically the University thesis. The program is an sensitive. Unions in MENA – some of which innovative pilot and impact evaluation has still have strong political leverage – continue to been embedded in the project to assess its favor the status-quo as defined by the post- effectiveness. independence social contract, making labor reform a rather complex and far-reaching What more could be done? In the short term political process. employment response packages (easy to scale- up) composed of a mix of programs/policies Also, access to micro-data for policy design in for employment generation, temporary MENA in the area of employment such as labor employment, and income protection to mitigate force surveys remains restricted, even among the impact of the youth employment crisis government officials and public institutions. could be considered. While far-reaching This limits the ability of policy makers to reforms are challenging. ALMPs and temporary formulate evidence-based policies. employment programs can help mitigating excess supply in the short run. Contact MNA K&L: • Programs targeted to skilled graduates Emmanuel Mbi, Director, MNA Operational Core Services Unit such as subsidized wages and or social security contributions, training, Labor Regional Quick Notes Team: Intermediation programs, international Omer Karasapan, Roby Fields, and Hafed Al- placement services, business promotion. Ghwell • Programs targeted to the unskilled would Tel #: (202) 473 8177 include public works, Regional MENA K&L Quick Notes: development programs, entrepreneurship http://www.worldbank.org/mena-quicknotes The MNA Quick Notes are intended to summarize programs with micro-credit components lessons learned from MNA and other Bank and training. Knowledge and Learning activities. The Notes do not necessarily reflect the views of the World Bank, In the medium term, countries need to establish its board or its member countries. more dynamic labor markets with appropriate labor market institutions. This means reforming March 2010 · Number 35· 4