Jobless youth: are they too many?
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.
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.