Efforts to get young people into work should come as part of a wider package of macroeconomic policies.

By Mary Kawar and Zafiris Tzannatos

The conclusion of yet another successful World Economic Forum in the context of this year’s timely theme “Enabling a Generational Transformation” provides food for thought in the battle to address youth unemployment. The initiative focuses on identifying skill gaps and securing commitments from businesses to help train young people across the Arab region. Paying attention to this side of the labor market (the “supply side”) is vital given the large number of young Arabs.

With nearly one million young Arabs entering the job market each year and facing an unemployment rate of nearly 30 percent while two-out-of-five graduates are out of a job, it’s natural for policy makers to be concerned about the future of their countries. The extremely high female unemployment rate among Arab countries, one of the defining characteristics of labor markets in the region, is an additional statistic suggestive of the underutilization of the region’s human capital.

An improvement in the employment outcomes of Arab citizens will have additional benefits. It can increase citizens’ welfare and also reduce the risk of spreading extremism. Failure to reduce unemployment can seriously undermine the social progress made over the last few decades.

However, judging from history, reducing youth unemployment has been difficult not only for the Arab countries, but even for developed economies including European ones. Two main reasons for this are the following. First, what economic theory tells us is that unemployment is mainly a macroeconomic issue. Thus, the main solution to unemployment is the much more difficult task to create employment for all, youth and adults, women and men. If macro, fiscal, monetary, exchange rate, industrial, banking and finance, investment, business development and similar policies are not conducive to development, then markets at the sectoral level will be distorted. These markets will be neither competitive nor dynamic, even in the absence of corruption. They will fail to match the labor requirements of employers with the qualifications and aspirations of citizens.

Under such distorted conditions, having good education and the right skills can help job seekers to emigrate but won’t be helpful at the local level. Jordanians working abroad are almost half those working in the private sector in the Kingdom. Arab migrants, including Jordanians, have the human capital and motivation to work hard and compete for jobs in sophisticated labor markets abroad. This “brain drain” will continue as long as prevailing economic conditions in the home country result in “brains in the drain.”

Second, the examination of youth unemployment often fails to take into account what is going on in the rest of the labor market. Examining the evidence at the macro level in the analysis of youth unemployment is rarely, if ever, acknowledged. In plain terms, when there is youth unemployment, there is also adult unemployment. And when there is female unemployment, there is also male unemployment.

The table shows these two facts clearer. Across the world, including Arab states and Jordan, there are more unemployed adults than unemployed youth. The share of youth in the unemployment pool is nearly 35 percent globally. It is higher in the Arab region and Jordan (43 percent), but this is driven largely by the higher youth population in the population compared to other regions where fertility rates are lower.

Similarly, there are more unemployed men than unemployed women. The female share averages 43 percent in the world, reaching 38 percent in the Arab region. Notwithstanding the fact that female unemployment rates are higher than those of men, male unemployment signifies that there are structural economic problems part of which is female unemployment.

The economic policy implication is that output loss and constraints to growth still come mainly from the underutilization of men and adults. Thus the challenge is much bigger than tackling youth unemployment. If the economy were to create more jobs for men and adults, it will also create more jobs for women and the youth. All in all, unemployment is the result of the economy not creating jobs, jobs for all.

Of course, there are many reasons that there should also be some specific policies addressing unemployment among certain groups. Unemployment and despair can result in an explosive youth population. Lack of employment opportunities for women deprives them of economic empowerment, perpetuating gender inequality and inhibiting women’s contribution to production, family incomes and economic growth.

Thus, selective policies can complement, though not fully replace, macroeconomic policies that would promote opportunities for all throughout the labor market. Still, it is worth examining to what extent such policies, such as those that aim to improve education, develop skills and promote entrepreneurship, can have a significant impact in the Arab labor markets.

For example, lack of quality education is not always the main cause of youth unemployment as the recent case of Greece attests. In Greece it was not a problem until its debt crisis in 2009. It was only after the economy collapsed that youth unemployment rocketed to nearly 70 percent. The over-education of Greeks and their entrepreneurial prowess proved insufficient in halting the adverse macroeconomic effects on the aggregate labor market.

As for entrepreneurship, it can be noted that during the ordinary course of development the share of employees in employment increases at the expense of the shares of all other types of employment that include employers and the self-employed, the prime pool in which entrepreneurs are found. The share of employees averaged 49 percent across the world in 2013, having increased by 7.5 percentage points since 1991. This share is even higher in the Arab region (64 percent) and has increased even faster in the last 20 years (by 9 percentage points).

Two issues are relevant here. First, it is unlikely that the number of emerging young entrepreneurs can be of any significance when compared to the one million new entrants into the Arab labor markets. After all, entrepreneurship is not synonymous to labor intensive production. In most cases, it leads to capital and IT intensive enterprises requiring a few but highly skilled workers.

Second, it is difficult to expect that the youth will take more entrepreneurial risks than their parents who have more financial resources, better knowledge of markets, and greater experience. If so, the faith placed on training the youth for entrepreneurship is misplaced. In a survey for Arab countries in 2011 respondents indicated that “lack of capabilities” was the least pre-launch challenge they faced for undertraining entrepreneurial activities. The major constraints to entrepreneurship were said to be lack of financing along with intensive competition among small and medium-sized enterprises and market dominance by a few firms. One can mention Lebanon in this respect: a very detailed study of more than 300 product markets revealed that only three firms controlled two-thirds of total sales.

Thus, the solution to youth unemployment cannot be simply training the youth to become entrepreneurs as much has to do with how economic policies shape the whole economy. The problems arising from oligopolistic markets were brought to the forefront after the Arab Spring, with frequent references to uncompetitive labor markets, macroeconomic mismanagement, rentier-seeking activities, and “crony” capitalism.

Turning to education and training, low quality education, and irrelevant labor market skills are said to be two of the main reasons for unemployment, especially graduate unemployment. Low quality education in the Arab region is a fact. All comparative international assessments of learning outcomes in science, math, and literacy show that Arab students are generally below the international averages. They also show that among the Arabs, students from labor sending countries (notably Jordan and Lebanon) do much better within the region, while those from the labor receiving Gulf countries fall below the mark.

This suggests that incentives for finding jobs are more important drivers for excelling in whatever education is available than education quality per se. For example, Jordanians and Lebanese are highly motivated by the few employment opportunities at home and better job prospects abroad. For the Gulf countries, where employment, especially in the public sector, is granted more on the grounds of nationality than achievement and effort, academic outcomes are low despite having well-funded education systems and some world class universities.

In any case, the issue is not the level of academic performance of students but whether a low quality education is a constraint to the growth of jobs across the region. Education increases employability, not employment. And employment creation has been constrained in the Arab region due to lack of competitive markets that prevent entry of new companies. Arab companies have a median age of around 20 years compared to less than 15 years in all other developing regions and reaching as low as 10 years in East Asia. Unsurprisingly, the percentage of Arab managers who have not completed secondary education is the highest in the world.

Even if low-quality education were to be dismissed as a candidate reason for youth unemployment, the issue of relevance of education needs to be addressed. This has implications for skills shortages and mismatches, references to which are at times more impressionistic than real—as a survey conducted by WEF confirmed.

WEF solicited the views of executives across the world regarding the education of their workforce. The results showed two rather unexpected facts.

On the one hand, the three countries with the highest dissatisfaction with the education system were Switzerland (14.1 percent), Austria (13.9 percent), and Germany (12. 6 percent). Obviously these three high-flying economies are operating at the technological frontier and move ahead at a speed that the education system can only play catch up. As a result, these three countries address the problem of “unsatisfactory” education systems by having some of the most developed and sophisticated training systems.

On the other hand, despite the widespread belief that skills are a serious issue, the percentage of unsatisfied Arab executives in non-oil economies was only 6.6 percent (and 8.5 percent in Jordan). This is in line with World Bank surveys that show that skills are the least constraints mentioned by Arab firms (at 31 percent) compared to other concerns such as tax rates and cost of finance (around 50 percent or more). This is followed by macro instability, administrative hurdles, restricted access to land, and corruption.

Other surveys have shown that only one-quarter of Arab firms offer training, the lowest rate when compared to all other regions. Specifically for Jordan, ILO research shows low rates of mismatches with almost as many overqualified as underqualified workers—each around 10 percent. This leaves the majority of workers, 90 percent of them, being adequately or even more qualified for what they are asked to do.

So far there has been no reference to the most important indicator in economics, prices. This corresponds to wages in the labor market and, in particular, the wage differential between more qualified workers compared to the less qualified workers. A large wage premium for the more qualified suggests that firms have to pay more for them as they are in short supply. A low wage premium means the economy does not need skills, has low value added production, and relies more on low wage/less qualified workers.

The latter applies to the Arab region. Indeed, the wage premium for qualified Arab workers has been the lowest in the world as it can be inferred from the return to investments in education. Each additional year of education increases wages by 5.5 percent in the Arab region. This is practically half that in the rest of the world (the global average at 10 percent).

Most analyses of youth unemployment in the Arab region have focused on problems on the labor supply side. One of them is the pursue of “credentialism” and soft subjects by Arab students aiming to get a job in the public sector, instead of studying subjects that are in demand by the private sector. This might have been historically correct but the share of the public sector employment has been shrinking over time as has also the wage premium and associated benefits associated with public sector employment compared to those on offer by the private sector. Moreover, recent results of the World Values Survey show that young Arabs prefer to work in the private sector, and university graduates do so at twice the rate of secondary school graduates.

Lack of drive among job seekers is another cited reason for youth unemployment. However, the region’s skilled emigration rate is among the highest. Again, the results from the World Value Surveys are illuminating. They strongly suggest there is nothing unusual about Arab citizens. They tend to have greater faith in markets than in their governments, compared to citizens in other regions. Moreover, the share of Arabs who believe that hard work brings success is higher than that in other regions. Cultural—including religious—factors in the area of economics and labor markets do not seem to be out of line with those in other regions.

The one area that the Arab region falls behind others is gender. In fact, gender differences in institutional constraints are greatest compared to other regions. Examples of legal constraints applied to Arab women include the right to apply for passport, ability to be head of household, choice where to live, conferring citizenship to children, getting a job without permission, property and asset ownership, freedom to travel and so on.

There are on average 20 such restrictions on Arab women, ranging from 12 in Lebanon to 29 in Saudi Arabia (and 25 in Jordan). This compares to a global average of only four. Still, as the table indicates, the share of unemployed Arab women in total unemployment is smaller than that of men’s, and is in fact smaller than the rest of the world. Therefore, the challenge to reduce unemployment in the Arab region is much bigger than just reducing female unemployment.

In conclusion, arguments about the low quality and irrelevant education along with shortages and mismatches of skills and lack of entrepreneurship among Arab citizens may be factually correct but can be misleading as a guide for addressing unemployment. The reality is these shortcomings are largely the result of poor economic policies, not the cause of unemployment. Addressing structural economic problems is a much bigger challenge than having measures for the unemployed. What is needed is to jump-start the Arab economies at the macro level so that growth accelerates and creates jobs for all, the youth and adults, women and men alike.

Dr. Mary Kawar is the International Labour Organization Country Director for Tanzania, Kenya, Uganda, Rwanda and Burundi.

Professor Zafiris Tzannatos is a Fellow of the Lebanese Center for Policy Studies.