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Unemployment and Labor Market Institutions: Theory and Evidence from the GCC

  • Nabi, Mahmoud Sami
  • Suliman, Mohamed Osman
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    The theoretical model delves into the relationship between labor market institutions and unemployment by proving two propositions: (1) allowing informal activity bolsters job creation, and (2) if the institutional environment is initially, sufficiently, weak, then mitigating it will lower unemployment. Simulating the model with the GCC’s unemployment for the period 1990-2007 allows us to decipher the validity of the model. The institutional environment is represented in this simulation by social insurance which is captured through oil prices. Hence, an increase in oil prices is assumed to lead to higher social insurance and, therefore ,to higher cost of hiring labour . The parameters are selected with the objective of minimizing the error gap between the effective unemployment rate and the simulated unemployment rate . The effective unemployment rate is constructed as a weighted average of the unemployment rate of nationals and non-nationals. The weights are the shares of national and non-national labour-force in the GCC countries. Expositional simulations verified the second proposition. Thus, improving labor market institutions, that are initially weak may discernibly alleviate unemployment problems in the GCC.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11858.

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    Date of creation: Dec 2008
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    Handle: RePEc:pra:mprapa:11858
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    1. Elhanan Helpman & Oleg Itskhoki, 2007. "Labor Market Rigidities, Trade and Unemployment," NBER Working Papers 13365, National Bureau of Economic Research, Inc.
    2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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