ISLAMIC DEVELOPMENT BANKEXPERT GROUP MEETING ON ADDRESSING EXPERT GROUP MEETING ON ADDRESSING UNEMPLOYMENT IN IDB MEMBER COUNTRIES IN THE POST CRISIS WORLDIN THE POST CRISIS WORLD

Labor Market Challenges in OIC Member Labor Market Challenges in OIC Member CountriesBelkacem Laabas Arab Planning Institute Kuwait9-10 May 2011, Jeddah KSAy ,

Contents: Labor Market Challenges In ICsContents: Labor Market Challenges In ICs

Introduction : Labor Market ChallengesDynamics of Labor Supply in ICsE i G h E l d J b Economic Growth, Employment and Job CreationsCan the Unemployment Problem be S l d ?Solved ?Conclusion and Recommendations: Conclusion and Recommendations:

IntroductionIntroduction

Islamic Countries a diverse group of poor and rich. All Countries are Developing, None is member of OECD. In Theory the Absence of Government Welfare Support for the In Theory the Absence of Government Welfare Support for the unemployed means that Unemployment should be low. Many of the countries are poor, people cannot afford to be

l dunemployedAverage Unemployment in Ics from Available data is around 10 % compared to global rate of 8%.Youth Unemployment ranges from 2 to 4 the Adult rateAverage Youth Unemployment Rate is 17% compared to 6 % for the AdultAdult.Despite good Economic Growth (2004-2008), poverty and unemployment are the major economic and social challenge facing most ICs most ICs

Unemployment Rate, Ics Unemployment Rate, Ics

0 250.300.35

0.150.200.25

0.000.050.10

ghan

istan

zerb

aija

nBe

nin

kina

Fas

oC

had

e d'

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rem

bia,

The

ea-B

issau

amic

Rep

. R

epub

licM

aldi

ves

ambi

que

Nig

eria

Sene

gal

Surin

ame

Togo

kmen

istan

zbek

istan

Bahr

ain

Ara

b Re

p.Jo

rdan

Leba

non

aurit

ania

Om

anQ

atar

Som

alia

Rep

ublic

Em

irate

s

AfgAz

Burk

Cot

eG

amG

uine

Iran,

Isla

Kyrg

yz M

Moz

S

TurkUz

Egyp

t, AMa

rian

Ara

b te

d A

rab

Syr

Uni

Table 1: Some Basic Indicators of E D l Economic Development

Indicator TIMMS Score

HumanCapital GDP Per

% Population Indicator

(Sample of 53 Ics)

2007(World 

Benchmark 500)

Capital (Average Years of

Schooling)

Unemployment Rate

GDP Per Capita PPP

2009

Living Under 2 US$ a Day

PPP) Schooling)

Average 396.9 6.3 11.8 12081.6 41.9

Max 541.0 10.4 59.5 159246.9 90.0

Min 211.0 1.8 0.5 534.1 0.3

Standard Standard Deviation 70.2 2.4 11.1 25312.1 29.0

Understanding Why Unemployment is High in ICsUnderstanding Why Unemployment is High in ICs

L b F h I f P l Labor Force is to a certain extent the Image of Population Dynamics and is mainly affected by Female education and fertilityfertilityPopulation in Ics increased from 485 Millions in 1960 to 1490 Millions in 2007 with average population growth rate of 2.4 % pa (2.2 % from 1980to 2007)Labor Force increased from 280 Millions in 1980 to 585 %

200 h h 2 %in 2007 with average growth rate 2.7 %Average ICs labor force participation rate increased from 66 % in 1980 to just 67% in 2007 Average labor force 66 % in 1980 to just 67% in 2007. Average labor force participation rate for middle income developing countries was around 71% of working age population. g g p pIcs have a population gift of 0.5 % (or Population Burden ?)

Female Education increased Rapidly to 93 % in Primary, 56 % in secondary and 18 % in TertiaryThis also led to decline in Fertility from 7 in 1960 to just 3.5 in 2007. The issuing decline in population growth rate in more than offset by increasing female participation rate in the labor market.Female labor force participation in the labor market p pincreased from 41 % in 1980 to 47 % in 2007 (Average Middle Income Developing is 50 %)( g p g )

Labor Supply: Population Growth Labor Supply: Population Growth

.05

Burkina Faso

Niger

Uganda

.04

2007

-200

9

Afghanistan

Benin

Cameroon

Chad

Cote d'Ivoire

Gambia

GuineaGuinea-BissauMali MozambiqueNigeria

Pakistan

SenegalSierra Leone Togo

g

Bahrain

IraqJordanMauritania

OmanSaudi ArabiaSomaliaSudan

Syria

Yemen

2.0

3ro

wth

Rat

e 2

AzerbaijanBangladesh

BruneiGabon

IndonesiaIranKazakhstan

MalaysiaMaldives

S i

Tajikistan

Turkey Turkmenistan

UzbekistanAlgeria

BahrainEgypt

Libya

Morocco

O a

Tunisia01.0

2op

ulat

ion

Gr

Albania

KyrgystanSuriname LebanonTunisia

0.0Po

0 .01 .02 .03 .04 .05Average population Growth Rate 1960-2980

Population Growth: Female Fertility and Female Education

AFGMLI

NER

UGASOM

7

BEN

BFATCD

GMB

GIN

MOZ

NGA

SLE

UGA

WBG

SOM

YEM

6o,

200

7

CMR

COM

GMBMOZ

PAK

SEN

SLE

TGO

DJIIRQ

MRT

WBG

SDN

45

Ferti

lity

Rat

io

COM

KGZ

TJK

DJI

JOR

LBY

SAUSYR

34

Fem

alr F

AZEBGDBRNIDN

IRN

KAZKGZMYS

SURTUR

UZBDZA BHR

KWT

LBN

LBY

MAR QAT

TUNARE2

0 50 100 150Female Secondary Enrollement Ratio, 2007

Human Capital and Education QualityHuman Capital and Education Quality

Labor quantity and quality is a major production input.

The education system is pivotal in building human capital and the required skills

Low human capital quality is thought to hinder economic growth by lowering total Low human capital quality is thought to hinder economic growth by lowering total factor productivity.

The incentive system and labor market signals creates a value system that eventually will distort education choices of peopleeventually will distort education choices of people.

Guaranteed government employment schemes tend to bias education choices towards more humanities and creates job mismatches as skill supply in not

i h l b d dcommensurate with labor demand.

Higher real wages will encourage people (Females) to enter the labor market

Higher Real Wages increases the cost of production thus shifting the production g g p g pfactors mix to more capital intensive technology.

Compared to World Average Benchmark Education quality gap is estimated at 21% and could Reach as much as 58% in some countries21% and could Reach as much as 58% in some countries

Average Human Capital is 6 Years of Education Compared to 14 Years in Developed Countries

Human Capital Level :Average Years of S h l 20 0 B d LSchooling 2010- Barro and Lee

10

12

8

10

4

6

0

2

……

fgha

nist

an

Alg

eria

Bahr

ain

Beni

n

Cam

eroo

n

Djib

outi

Gab

on

Indo

nesiaIraq

azak

hsta

n

z Re

publ

ic

Liby

a

Mal

dive

s

Mau

ritan

ia

zam

biqu

e

Om

an

Qat

ar

Sene

gal

Suda

n

yria

n A

rab …

Togo

Turk

ey

ited

Ara

b …

emen

, Rep

.

AfCKa

Kyrg

yzM

MozSyUnYe

Education Quality Gap (500 TIMMS)/500(500-TIMMS)/500

0.60

0.70

0.40

0.50

0.20

0.30

0 0

0.00

0.10

tan

riaain

nin

oon

outi

bon

siaaqtan

blic

bya

ves

nia

queantar

gal

anblicgokey

tes

ep.

-0.20

-0.10

Afg

hani

stA

lge

Bahr

aBe

nC

amer

oD

jibo

Gab

Indo

nesIra

Kaza

khst

rgyz

Rep

ubLib

Mal

div

Mau

ritan

Moz

ambi

qO

mQ

atSe

neg

Sud

Ara

b Re

pubTo

Tur k

Ara

b Em

irat

Yem

en, R

e

Kyr

Syria

n A

Uni

ted

A

Labor Demand and Job CreationLabor Demand and Job Creation

Notwithstanding the labor force inflow to labor market, labor demand (employment) is the other element

fresponsible for high unemployment.Employment Data is scarce and Fragmented.Labor demand is tightly related to the capacity of the economy in creating permanent jobs and to the nature of growth (technology, productivity or capacity expansion)The nature of labor demand elasticity of output i.e by how much labor demand increase if output increases by p y1 % summarizes the dynamics of job creation.

Growth Literature is vast and there is disagreement on the exact causes of Growth (policies, Institutions,

fCapital and resources, technology and ideas, fixed effect factors)Over the period of 2004-2008 average economic growth was robust and around 6 % pasome countries suffer from high growth volatility.Average volatility measured by the coefficient of g y yvariation was 0.44, which means that average growth was more than double the standard deviation.

Average Output Growth 2004-2008Average Output Growth 2004 2008

25.00

15.00

20.00

10.00

5.00

0.00

Afg

hani

stan

Alb

ania

Aze

rbai

jan

Bang

lade

shBe

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ussa

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na F

aso

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nC

had

Com

oros

ote

d'Iv

oire

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onam

bia,

The

Gui

nea

inea

-Biss

auIn

done

siasla

mic

Rep

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zakh

stan

yz R

epub

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alay

siaM

aldi

ves

Mal

ioz

ambi

que

Nig

erN

iger

iaPa

kist

anSe

nega

ler

ra L

eone

Surin

ame

Tajik

istan

Togo

Turk

eyur

kmen

istan

Uga

nda

Uzb

ekist

anA

lger

iaBa

hrai

nD

jibou

ti A

rab

Rep.

Iraq

Jord

anKu

wai

tLe

bano

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ritan

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oroc

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and

Gaz

aQ

atar

udi A

rabi

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mal

iaSu

dan

ab R

epub

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ab E

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emen

, Rep

.

AAB

Brun

ei DBuCo

Ga

Gui

Iran,

IsKKy

rgy

Mo

SiTu

Egyp

t, M

Wes

t Ban

k Sa

Syria

n A

r a

Uni

ted

AraY

e

Assessing Job Creation in ICsAssessing Job Creation in ICs

Employment elasticity estimated by dividing the average (2004-2008) employment growth rate by the average (2004-2008) real GDP growth rate:

)( iELnΔ

B i th t th b l ti i t bl th )()(

i

ii YLn

ELnΔΔ

=ε

By assuming that the above relation is stable, the rate of job creation is related to economic growth:

)(.)( iii YLnELn Δ=Δ ε )(.)( iii nn ε

Assessing Job Creation in ICs

U l t i th diff b t l b f d l t

Assessing Job Creation in ICs

Unemployment is the difference between labor force and employment, Growth of the unemployment level is:

)()()()()( YLLFLELLFLUL ΔΔΔΔΔThis equation is an Okun curve that states a negative relationship between economic growth and the percentage change in the le el of

)(.)()()()( iiiiii YLnLFLnELnLFLnULn Δ−Δ=Δ−Δ=Δ ε

between economic growth and the percentage change in the level of unemploymentAverage elasticity is around 0.6, average economic growth should 40% hi h h l b f h i d hi i h i higher than labor force growth in order to achieve a negative growth in the level of unemployment. Given the fact that growth over 2004-2008 was about 6% pa and that labor force growth was around 3%, unemployment level was decreasing only by 0.6% or 6% over 10 years if historical growth level is sustained.

Employment ElasticityEmployment Elasticity

2

2.5

1.5

2

0.5

1

0

stanija

n

enin

Faso

had

oireThe

ssau

Rep.

ublic

ives

que

eria

egal

ame

ogo

stan

stanrain

Rep.

dan

anon

ania

man

atar

alia

ublic

ates

-1

-0.5

Afg

hani

s

Aze

rbaBe

Burk

ina

FCh

Cot

e d'

Ivo

Gam

bia,

Gui

nea-

Bis

ran,

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mic

R

Kyrg

yz R

epu

Mal

d

Moz

ambi

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e

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Surin

aTo

Turk

men

is

Uzb

ekis

Bahr

gypt

, Ara

b R

Jord

Leba

Mau

rita

Om

Qa

Som

a

n A

rab

Repu

d A

rab

Emira

IrKEg

Syria

n

Uni

ted

Economic Growth and Job CreationEconomic Growth and Job Creation

BRN

COM2

BRN

CIVTGO

DZA

1.5

ticity

BEN

BFACMR

GAB

GINGNB IRN MDVNERPAK

SENTJKEGY

IRQJOR

WBG

SAUSYR

ARE

YEM

51

oym

ent E

last

AFG

ALBBGD TCD

GMBIDN

KAZ

KGZMYSMLI

MOZNGA

SLE

SURTURTKM

UGAUZBBHR

G JOR

KWTLBN LBYMAR OMN SDNTUN

ARE

0.5

Em

ploy

MRT-.5

2 4 6 8 10 12Economic Grrowth 2004-2008

Employment Elasticity end Employment Growth Employment Elasticity end Employment Growth

DZA

6

MDVPAKTJK

WBG

SYR

500

4-07

AFG BENBFATCD

IRN

NERSENSLE TGO

UGAUZB

EGY

JOR

SAU

SYRARE YEM

4nt

gro

wth

2

AZE

BGD BRNCMR

COM

CIV

GAB

GMB

GINGNBIDN

KGZ

MYS

MLIMOZ

NGA

SENSLE TGO

TKM BHRKWT

LBN

LBY

MAROMN

SDN

TUN

23

empl

oym

en

ALBKAZSURTUR

1

-.5 0 .5 1 1.5 2Employment elasticity of output, 2004-07

Size of Unemployment In ICsSize of Unemployment In ICs

NGA

4

BGD

NGA

PAKTUREGY

3on

s, 2

007

IRN

TUR

DZA

2en

t lev

el m

illio

AFGCMR

CIVKAZMOZ

SEN

UZB

IRQ

MARSDN

SYRYEM1

unem

ploy

me

ALBAZE

BEN BRNBFA

TCD COMGAB

GMBGIN

GNB

KGZMYS

MDV

MLINER

SEN

SLE SUR

TJKTGOTKMUGA

BHR

JOR

KWTLBY

MRT

OMNWBG

QAT

SAU

SOM

TUN

ARE0u

0 1 2 30 .1 .2 .3Unemployment Rate 2007

Youth Unemployment Youth Unemployment

ALB

WBG40

ALB

JOR SAU

TUN30nt

Rat

e

IDNIRNSUR

TUR

DZA

BHR

EGY

LBN

MAR SYR

20U

nem

ploy

men

AZE

BGDKAZ

KGZ

MYS

PAK

SEN

KWTARE

10You

th U

BEN

MDVNER

SLE

QAT

0

0 5 10 150 5 10 15Ratio of Youth to Adult Unemployment Rate

Size of Unemployment in ICsSize of Unemployment in ICs

A l t th i IC 3 2 % l t l t Average employment growth in ICs was 3.2 % pa almost equal to the growth of the labor force of 3.0 % which means that only a marginal decline in the unemployment could be achievedH bl f h l l f l ll I Here are no viable estimates of the level of unemployment in all Ics. From available data, we estimate the outstanding level of unemployment in 2007 as equal 46 million persons. Average unemployment rate in the same year was 12 %, but with large differences among the countries with a standard deviation of 6.4 % and minimum unemployment rate was 1.5 % and maximum of 32 % 32 %. In large population the unemployment level reached 11 millions in Indonesia, and more than 3 millions in Bangladesh. However in most countries unemployment level is below the one million mark.

Youth UnemploymentYouth Unemployment

Adult unemployment rate was only 5.7 % compared to 17 % for the youth. This rate could rise above the 30 % as in Albania or Tunisia. The ratio of youth to adult rate was 4 and could be as high as 15 times as is the case of Kuwait as high as 15 times as is the case of Kuwait. The youth unemployed constitute 46 % of total

l unemployment.

Can The Unemployment Problem Be addressed

h h d d d b ll

Can The Unemployment Problem Be addressed

How much growth is needed in order to substantially reduce unemployment in ICs. W i h i i 2015 d h l b We use a time horizon in 2015, and assume that labor force growth rate will stay constant unchanged. W l th t l t l ti it i t t We also assume that employment elasticity is constant and equal the average of the period 2004-2208. We put the target unemployment to be reached in We put the target unemployment to be reached in 2015 to 5 %First we calculate the projected employment in 2015 First we calculate the projected employment in 2015 using the Okun parameter

Labor Market Projection ModelLabor Market Projection Model

720082015 ))ln(1.( YEE Δ+= ε

7)1( θLFLF 720082015 )1( θ+= LFLF

20152015 1 LF

EU −=

20152015 LF

20152015* *)05.01( LFE −=

2015*2015 EEJobs −=

ε)()(

** ELnYLn Δ=Δ

Can The Unemployment Problem Be addressed

On the basis of these assumptions labor force in ICs will increase to 715 On the basis of these assumptions labor force in ICs will increase to 715 millions in 2015 and employment to 663.6 million giving a total number of unemployed of 15.5 million persons. The unemployment rate will increase to 12 % from 10 % in 2007The unemployment rate will increase to 12 % from 10 % in 2007.Many of the countries will still have unemployment rate below the 5% mark if they continue to grow at past rates. In order to reduce unemployment rate to 5 % in 2015 an extra 22 million In order to reduce unemployment rate to 5 % in 2015 an extra 22 million jobs are needed. In fact by projecting employment on the basis of past trends, aggregate employment in ICs will grow by 2 8 % pa between 2007 and 2015 employment in ICs will grow by 2.8 % pa between 2007 and 2015. In order to achieve 5 % unemployment rate employment need to grow by 3.6 % pa during the same period. Gi l t l ti it f 0 46 hi i 5 % Given an average employment elasticity of 0.46, achieving a 5 % unemployment rate require an average growth rate of 7.8 % pa.

Conclusion and RecommendationConclusion and Recommendation

Ics face development problems of poverty and unemployment

Historically population growth was high, however abated because of population growth transitionpopulation growth transition

Labor force inflows to the labor market are still robust (Female and past youth cohorts).

Economic Growth solid and adult unemployment rate is about 5%.

Youth unemployment may not respond to economic growth some active labor market policy is neededlabor market policy is needed:

Human capital upgrading

Improve the quality of education

Send the right policy signals in order to correct labor market distortions

Make labor market more flexible

Encourage more job creation for the youth through targeted employment schemes Encourage more job creation for the youth through targeted employment schemes, youth training, public employment programs.