Tyranny of numbers

Jobless youth: are they too many?

Posted in Employment by Djavad on May 9, 2009

In my last post I argued that what is wrong with Iran’s unemployment is not the quality of data (though there are quality problems) nor that they come from official sources. The problem is rather with the structure of unemployment, which is is unjust and inefficient.  The burden of unemployment falls disproportionately on the young and that they wait a long time after graduation to find a job and get along with their lives.  Instead of arguing about the data collection and manipulation, we should be discussing the underlying economic structure that generates this pattern in the data.

A favorite reaction to the severe problem of youth unemployment is that it is caused primarily by the youth bulge (too many young people); another is that there are not enough jobs.  But these arguments are in essence mere tautologies.

Any unemployment problem can be “explained” as the consequence of too many people seeking too few jobs.  Yes, there are unusually large numbers of young people entering the labor market because of the baby boom of 1979-84 (see graph below).  In 2006, Iran had the world record –35 percent — for the faction of total population in ages 15-29.  It is also true that job creation has been slow because the economy, or more accurately, the private sector has been less than dynamic.  Between 1996-2006, the economy created 10 million new jobs, and employment grew at about the same rate as the working age population, but increased participation of women in the labor market during this period increased the unemployment by about 3 percentage points, from 9.6% in 1996 to 12.4% in 2006.

Figure.  The  youth bulge moving through in the last two decades.

youthbulge

Source: Statistical Center of Iran, The National Census of Population, 1986-2006.

There is a temptation to wait for the youth bulge to pass through, which it will in about ten years.  But it is not a good option.  By 2015, the acute problem of youth unemployment that we have today will have subsided (hopefully!), but that would only help hide the underlying structural problems that need to be addressed now.  The youth bulge is an opportunity to see the extent of these problems.  In addition, alleviating youth unemployment early would save a generation from thinking and believing that they live in an unfair and unfriendly world of work called a market economy.

These structural problems are of two main types. On the demand side, there is the weakness of the private sector.  Private firms are the only source of jobs for the incoming labor force because the public sector is saturated and cannot, and should not, grow. The realization that the government is unable to solve the employment problem except by withdrawing from the center stage, has given rise to a love-hate relationship with the government.  Many in Iran blame the government for their problems as the look to it for solutions for the employment problem, among others.  For their part, politicians fan the belief that a good government can solve their problems, and raise the hope, which is not eternal, that with the right person elected president, these problems can be solved.  How exactly that will happen, no one seems to know.

What is keeping the private sector from creating more jobs?  There is whole list of things, including the lure of the oil rent which distorts their incentives to invest in productive enterprise, uneven competition with  public and semi-public firms, the weakness of Iran’s system of contract law and enforcement of property rights, especially for intellectual property, and the heavy regulation of private employment.

No one knows which of these–or perhaps others I have not listed– are the most  important restraints on the growth of private sector.  We hear a lot about the oil rent, mainly as complaints about the missing oil money and how it has caused corruption.  As a problem in distribution, I think this is quite a bit exaggerated.  Ask the average person to tell you how much oil money there is, and the answers could be several times the truth (which is about $1-3 per day per person). But as a problem of adverse incentives that distorts the behavior of private employers, it is hard to exaggerate.

I have listed as disincentives for private sector a few items that I know very little about and are in any case very controversial, but what I really want to talk about, is the effect of regulation of employment and the rigidity of Iran’s labor market on youth, about which I know something about.  This is no less politically charged than other factors that I am not talking about, but this one can be and should be discussed in calm venues, of which I hope this weblog is one.  The discussion of employment regulation has been highly charged in the post-revolution years because capitalism,as the system that supported the Shah, took a big hit in 1979.  The society has not found a way to calmly but seriously discuss how free it wants its capitalists to be.  So it is that discussions about Iran’s Labor Law of 1990, which should be a technical topic in Law and Economics, is usually about neither.  It is instead about good people vs. bad people (otherwise known as neo-liberals!).

But I believe that the discussion can be rescued from this tight ideological space and brought into a more open, rational space.  Not every economist is trying to defend someone else’s class interest.

Take Articles 75-78 of the Labor Law which are there to benefit and protect women. On the surface they do, but they also hurt women’s employment because they raise the cost of hiring women for employers.  If the Law discourages employers from hiring women in what is it pro-women?  The answer depends on your political orientation.  If you are right leaning, you nod, and if left leaning you might say private employer are wrong to do that, which is simply to avoid the dilemma.

But there is a third way which accepts the logic of the private employment system, and sees the role of policy as finding a way to persuade private employers to do the right thing.  Clearly, a society that values women’s employment and also would like their work conditions to be at a certain level, must be prepared to pay for its choices.  Shifting the cost to employers is not a solution.  It raises the cost of hiring women relative to men and will punish them through increased discrimination and reduced number of jobs available to them. Subsidy for provision of services for women at the workplace would seem to me as a better alternative than adding them to employer’s cost of hiring women.

Job security, another social obligation that the Law has pushed onto employers, has similar consequences for the young.  Job protection favors older workers (insiders) to the disadvantage of  young, new labor market entrant (outsiders).   But this is a longer story for another day.

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11 Responses

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  1. Mary said, on May 15, 2009 at 9:32 pm

    Hi Djavad! I didn’t know that you had a blog! Nice! 🙂 Have a great weekend!

    Mary

    • dsalehi said, on May 15, 2009 at 11:52 pm

      Hi Mary! thanks!

  2. a said, on May 11, 2009 at 8:11 pm

    I want to add something else. I preferred to post it separately since this more general and methodological. This may be a little strange.

    I think that one of important issues that economists miss is the following: they are thinking secularly, trying to apply these in a religious Islamic country. (To do this they usually try to find tricks to get around religious rules.)

    These secular solution for optimizing a problem (say unemployment) is completely logical if you are working in the west, i.e., they are probably the best solutions we are aware of currently. They optimize the system to solve the problem (probably restricted to the space of solutions these cultures allow, e.g., you can not say discriminate based on possible personal reasons even if they are reasonable, i.e., a company working about Churches may get more costumers if it only employs Christians (there are better examples but I try to not get into them for reasons you can guess) but this is not allowed in say UK. The government is not just trying to solve these problems without restrictions. The restrictions of societies are different in Islamic countries like Iran. Let me give an example:
    Interest (as in say UK) would be considered forbidden (as “reba”) in an Islamic country. But it may make complete sense from the economic point of view to permit it. Economists base their model only on the economic factors (and some restrictions enforced on them in the western countries), this is not acceptable in a religious country like Iran (there is exact phrase in Quran that states: they are saying rebaa is like commerce, but God forbid rebaa and allowed commerce, and if they insist on reba then they should declaring war against God and his prophet). In place of trying to optimize the system with the restrictions in Iran, they are spending all of their time to find ways to get around these restrictions and apply the same solutions which are obtained for the restrictions in western cultures.

    I hope that I was able to express what I meant.

    • shahram said, on May 13, 2009 at 12:00 am

      Mr/Mrs a,

      I do disagree with your discussion that economics rules and facts cannot be applied to the case of religious countries in particular Iran! If you decide to deposit your money in a bank, they pay you “soode mosharekat” which is kind of interest rate, isn’t it? Reciprocally, if you would like to get a loan from banks, you pay back their money including interest rate! Beside this, how about other religious countries? have they failed to implement their policies consistent with the findings of economics?

      • a said, on May 13, 2009 at 9:37 pm

        Shahram,

        First, let me thank you for your reply. Now,

        “I do disagree with your discussion that economics rules and facts cannot be applied to the case of religious countries in particular Iran!”

        You are attacking a straw man! I haven’t said that. Economics as far as we are considering the mathematical models and their properties, is independent of any culture, and the theorems proved are all as correct as mathematics. But that is only part of economics, the other part is using these models to study the reality. We choose a model and argue that is representing the reality we are studying (to good enough degree for our purpose). This part is not something that you can prove to be correct mathematically. What I am saying is this: in reality, different societies impose different restrictions, and these in turn restrict the space of acceptable solutions.
        Example: in UK, an employer can not discriminate against possible employees w.r.t. religion or gender or … although from purely economical point of view it is completely reasonable that an employer wants to have a special type of employee. The problem is that these restrictions are not stated clearly, therefore some people feel that there are not any restrictions in say UK. A little rational thinking can show that there are ethical or other types of restrictions imposed on the system. Now, the restrictions imposed are different from one society to an other, therefore the space of acceptable solutions are different, and the optimal solution can be different. But since it is much easier to use the models that people have used in west and their solutions. And to make these solutions work they try to get around the different restriction these societies impose, or try to change the society. They are too lazy to use tools that economics provide to solve new problem. This is simply cheating, changing the reality to fit our model.
        This discussion is completely independent of the society being religious or not. Any different societies can probably impose different restrictions.

        “f you decide to deposit your money in a bank, they pay you “soode mosharekat” which is kind of interest rate, isn’t it? ”

        1. You can have some profit when you put your money in the bank. This does not need to be a western type interest, i.e., you lend money and receive more than what you gave, without any risk or any work. Soode mosharekat can be something different, say you put money in the back and allow it to invest and share the risk and profit.
        2. In my humble opinion, the fixed rate promised interest which we have currently in Iran is a kind of “reba” (I can here Nourbakhsh lovers protesting already). From my point of view, this is a good example of getting around the rules.

        “Reciprocally, if you would like to get a loan from banks, you pay back their money including interest rate! Beside this, how about other religious countries? have they failed to implement their policies consistent with the findings of economics?”

        Interestingly, BBC has published an article two days ago about Islamic banking you may want to take a look to get a partial answer to your questions:
        http://news.bbc.co.uk/2/hi/business/8025410.stm

      • a said, on May 15, 2009 at 6:08 am

        This is also an interesting example:

  3. a said, on May 11, 2009 at 7:55 pm

    This is long post and I am not knowledgeable in this area. I just want to see if understood your post correctly.

    The problem we are talking about is unemployment. It is growing because on the one hand, more people are seeking jobs (A) since:
    A1. “the baby boom” generation are passing through the age range 15-29 (I think 25-30 is more accurate since the baby boom happened in 79-84),
    A2. more women prefer to work.
    And on the other hand, the job market is not growing as fast (B).

    A1 will be hopefully solved in 1 or 2 decades, but probably we can not do anything about it right now.
    A2 is not considered a problem here.
    So we are left with B. B has different causes:
    B1. public sector is (over)saturated and should not grow,
    B2. private sector is not creating enough jobs (I would prefer to say enough “interesting” jobs for job seekers.)

    So the problem is reduced to see the causes of B2, including:
    C1. “the lure of the oil rent which distorts their incentives to invest in productive enterprise”,
    C2. “uneven competition with public and semi-public firms”,
    C3. “the weakness of Iran’s system of contract law”
    C4. “[the weakness of] enforcement of property rights, especially for intellectual property”,
    C5. “the heavy regulation of private employment”,

    You are saying that C1 is not as essential as it is usually considered (, although I don’t think that the amount of money each person will receive is a good argument for it).
    In this post we are considering C5.

    Then you are stating that these problems are not discussed rationally.

    The last part considers two problems about Iran’s heavy regulation of empolyment:
    D1. protection for women
    D2. job security

    D2 causes private sector to keep older workforce, but it is going to be discussed later.

    I am not sure that if I understood the last part of your post about D1. Are you saying that the extra cost of employing women in place of a men should be payed by government? I don’t want to get into non-purely economical part of it right now. Economically what you suggest will increase the percentage of employed women. But that will only increase the unemployment (you are not creating new jobs, you are just giving more incentive to women to enter job market.)

    ps: The link in the post is not working.

    • dsalehi said, on May 12, 2009 at 6:25 am

      Thanks. You did a great job summarizing and organizing my post. C2 should be uneven competition between public and semi-public firms with private firms. The bit about women’s employment was intended to illustrate my suggestion that cost of reaching social goal should be paid for by the society as a whole, and not by employers. This will lower the cost of hiring women and raise women’s employment, which would only increase the market’s gender fairness. Men and women should compete fairly for jobs. Yes, this will raise unemployment, but that problem should not be fought with disincentives for women to enter the labor force.

      • a said, on May 13, 2009 at 9:04 pm

        Thanks. I was confused because I seemed to me that the main theme of the post was reducing unemployment, where as the final suggestion was going to increase it. I usually have problem understanding which objective function we are trying to optimize is an other problem of me when reading (the other one was the understanding what is the solution space that I stated in my second comment.) A few comments:

        1. This (fairness of job market w.r.t. gender) is not a purely economical topic, and is an example of what I meant by socio-cultural (or if you prefer, ethical or ideological) restrictions of system that define the . From economical point of view I think it is reasonable that as an employer I would prefer some kind of employees to others. This is one of restrictions which are not made transparent because they are accepted by default to (a great extend) in the culture that these economical theories have developed.

        2. Historically, as far as I know, the increase in the number of women in the west seeking jobs outside their home happened after industrial revolution. There were more jobs that there were (mainly men) job seeker. Employers had incentives to employ women (and children), and they were much less confrontational than men (and easier to exploit). On the other hand, paradoxically, the families were not earning decent wages, so there were also incentives for families to allow women and children to work. I am not sure people at the time would have called this “fairness of job market”.

        3. As far as I know, in the current western government, the employer is the person paying the cost of the things that are mention the labor law you linked.

        4. I think there is a mistake about “laws for protection of women in job market” and “promoting working of women (outside house)”. The intention behind the law you mentioned is the first one, not the second one. The conflict that you mention, i.e., the law is working in the reverse direction of increase of women working (outside house) is caused by mixing these two different (though related) intentions.

        5. For the sake of making it clear, I am not against working of women outside house. The discussion about the restrictions was just for demonstration of the effect of socio-cultural conditions which impose restrictions on the solution space by considering an example.

        6. I am sensitive to the view that women in their homes are not working. If you take it seriously, they are acting as a cook, an organizer/cleaner, a full time baby sitter, a private teacher, … If you want to get the same job done, probably with a much lower quality, by someone else, you have to spend a lot of money. That’s why I am against calling the promotion of work of women outside their homes “fairness of job market w.r.t. gender”. There are a lot of women working in their homes which people don’t even want to consider as having a job (and of course don’t want to pay for it.) I would call it fairness of job market only if they are also payed for the work they are doing.

  4. […] Original post by dsalehi […]

  5. Youth unemployment said, on May 9, 2009 at 6:45 pm

    […] Original post by dsalehi […]


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