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Blog » What is Holding Back the Creation of Better Jobs in MENA? by Federica Saliola

What is Holding Back the Creation of Better Jobs in MENA? by Federica Saliola

Created Jun 15 2020, 5:26 PM by Teuta Gashi

What is holding back the creation of better Jobs in MENA?

About 300 million jobs need to be created in the Middle East and North Africa (MENA) region in the coming 20 years. The Covid-19 crisis may exacerbate this challenge as labor markets are being disrupted at an unprecedented pace. Tourism, for example, which accounted for 6.7 million jobs across the MENA region in 2019, is one of the worst-affected sectors during the crisis.

Despite the rising number of jobs that need to be created, labor markets in MENA have been slow to change. Since 2000, the overall unemployment rate stood at about 10%. Youth unemployment rates in the region have been the highest in the world for over 25 years, reaching 27% in 2019. Female labor force participation is the lowest in the world, being only 22% in 2019 that is less than half the global average of 54%. At the same time, an estimated 76-80% of employed youth work in the informal sector for economies such as Egypt, Jordan, Lebanon, Tunisia, and West Bank and Gaza.

What’s holding back labor markets in MENA?

To answer this question, it is important to first define the central challenge of labor markets, which is not just creating more jobs (e.g. informal jobs) but better jobs – those in which labor productivity, wages and incomes raise. The ideal labor market is one where workers can move from lower to higher productivity jobs, and youth, women and the vulnerable are empowered.

Better jobs can only be created through economic transformation, which entails, among other things, increasing firms’ productivity through investment in capital and technology, raising labor productivity and responding effectively to the evolving patterns of technology and demand. While this agenda can be broad, the jobs challenges facing MENA – both in the quantity and the quality of jobs needed – require a focus on contestability.  

In theory, contestable markets are those where barriers to entry are negligible. Market contestability is important as it results in competitive pressure - the threat of entry - which makes existing firms behave as if the market has a highly competitive market structure. Contestable markets can deliver the theoretical benefits of perfect competition, but without the need for a specific market structure that consists of a large number of firms.

Competitive pressure is one of the main drivers of productivity growth, which is essential for the creation of the better jobs. Indeed, competitive pressure can influence firms’ behavior affecting the incentives to invest in key factors such as labor and capital inputs, IT and R&D. Competitive pressures can also affect productivity levels within an industry through a selection process that leads the more efficient producers to grow faster than less efficient ones, or when more efficient entrants replace less efficient exiting businesses.

The changes in firms’ behavior that are influenced by competitive pressure also impact labor reallocations through job creation and destruction (job flows are generated by the entry and exit of firms and by the reallocation of labor by incumbent firms). Furthermore, if incumbent firms are also in a continuous process of adaptation in response to the competitive pressure (e.g. development of new products and processes, the growth and decline in markets, etc.), they also need to constantly adjust their workforce.

In practice, the evidence points to a different setting in MENA where:

a. Markets remain largely uncontestable …

Impenetrable barriers prevent firms from entering or leaving crucial markets. The economies of MENA have favored incumbent firms, whether private sector or state-owned, and political connectedness remains the most important determinant of the performance of some firms in various countries of MENA.

b. …. disincentivizing the private sector from investing in capital, labor or technology ….

Over the last decades, low creation of new businesses and limited role and expansion of enterprises has characterized MENA, consequently limiting investments and productivity growth (figure 1).

Figure 1 – Despite significant growth rates, MENA’s capital per worker still lags.

 

* ECA excludes Western Europe, Southwestern Europe and the Nordic countries. EAP includes Japan but excludes China for lack of comparable data.Note: These aggregated ratios use the denominator (L), i.e. the share of each country’s labor force in the region, to weigh the ratios. This is in line with World Bank method of aggregating ratios. Source: MTI tool (CEM 2.0)

 

c. …. and depressing job creation while preventing economy transformation.

Not only unemployment rates remain the highest in the world, but the region did not experience a significant increase in productivity (figure 2). Furthermore, MENA did not experience a shift of workers and production from low value-added sectors to high value-added ones. On the contrary, for some countries in the region employment expansion was particularly evident in low-productivity sectors. Another an outcome of MENA’s limited structural transformation is that jobs show low levels of technology adoption and labor productivity and they are significantly low intensive in tasks that complement new technologies (i.e., non-routine interpersonal and analytical).

Figure 2 - Average annual labor productivity growth has been lower than EAP and SAR

Contribution to labor productivity growth

 

Share of the contribution of structural change to labor productivity growth

Source: World Bank, Job Diagnostics Tool

Prioritizing the creation of more and better jobs is critical for MENA. To realize this goal, contestable markets are a priority to promote innovation and productivity, which in turn could reallocate labor towards more productive firms and create better jobs. More contestable markets can also lift those barriers to entry that reinforce exclusion and segmentation (e.g. for female entrepreneurs). This goal is even more urgent now given the Covid-19 crisis, which is damaging otherwise healthy firms (already few in MENA) and make it difficult for new businesses to enter the market.