Labor Markets and Economic Growth in the MENA Region

The labor market plays an important role in economic development through its impact on the acquisition and deployment of skills. This paper argues that countries in the MENA region failed to deploy human capital efficiently despite high levels of education because of a large public sector which has distorted incentives and because of excessive regulation in the private sector. The education system is geared to the needs of the public sector so the acquired skills are inappropriate for growth-enhancing activities. Excessive regulation of the private sector further removes the incentives for employers to recruit and train good workers. As a result, MENA countries found it difficult to adapt to new conditions in the 1990s and their rate of productivity growth fell to very low levels. The group as a whole failed to keep up with countries that used to be at a comparable level of development, such as East and South-East Asia.