The Determinants of Youth Unemployment in the Arab Countries

The Arab countries of the MENA region adopted a state-led development path in the sixties and seventies. Since then, the government and the public sector have become the principal owners of factors of production and labor force employer (Cammett et al., 2015). The private sector has played a relatively small role in the economy. Salehi-Isfahani (2012) projected high youth unemployment rate to be a key challenge. The purpose of this paper is two-fold. First, we discuss the development of youth unemployment over time in the Arab world. Second, we examine empirically the determinants of youth unemployment rate. The panel regression model includes the lagged unemployment rate to account for the persistent nature of unemployment in the Arab world. It also has macroeconomic variables (the GDP growth rate to account for Okun’s law, the inflation rate, and a measure of state-led development), human capital (quality of education), and institutional (labor market flexibility and efficiency), and governance variables.Our approach is to use panel data on 115 developed and developing countries and accounts for the Arab countries through an Arab dummy and interaction terms. Random effects and system estimation methodologies are adopted. Empirical evidence shows that labor market efficiency, namely linking pay to productivity and reliance on professional management, and growth reduce youth unemployment rate in the non-GCC Arab countries. The evidence further shows that inflation rate, education quality, and state-led development decrease the unemployment rate in the GCC countries.