What reduces unemployment rates in the Gulf Cooperation Council countries: growth, flexible labor markets, or social contract?

ABSTRACT

In this research, we empirically examine the structural and macroeconomic determinants of unemployment rates in the Gulf Cooperation Council countries, distinguished by age and gender. We examine several hypotheses regarding the influence of long-run economic growth, labour market flexibility, and the social contract on unemployment rates. Using panel data for the period 2000–2020 and country and time fixed effects estimation methodology, empirical evidence shows that long-run growth reduces unemployment rates regardless of age and gender (except for female youth unemployment rate). Wage flexibility reduces most unemployment rates. Urbanization reduces total and male unemployment rates, while population density reduces total and female unemployment rates. In contrast to these determinants, linking pay to productivity, increases female, total youth, and male youth unemployment rates. Openness ratio increases total, total youth, male and male youth unemployment rates but not female and female youth unemployment rates. The paper has important policy implications for reducing unemployment rates in the Gulf Cooperation Council countries.

KEYWORDS:

• Labour markets
• social contract
• unemployment
• youth unemployment
• Gulf Cooperation Council countries

JEL CLASSIFICATION:

• J6
• J1
• J4
• E2
• H5

Acknowledgments

The author acknowledges the financial support of the College of Business and Economics at the United Arab Emirates University through the College Annual Research Program (CARP).

Data availability statement

Data is publicly available from the different sources as specified in the ‘Data and Estimation Methodology’ subsection.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Labour markets are segmented into two: one segment is for protected government jobs mostly for nationals, while the other is for private sector jobs mostly for foreign labour.

² The average GCC growth rate in 2000–2019 amounted to 4.7% compared to 2.7% for the other high-income countries. Income level classification of countries is based on World Bank (2022).

³ One caveat we make in this research is that data on labour market flexibility and efficiency seem to reflect the foreign, as opposed to the national, labour segment.

⁴ Recently Mina (2021, 2023) examines the relationship between labour markets and youth unemployment in the GCC countries.

⁵ Theoretically, by offering high wages, together with unemployment benefits as a social protection mechanism, the generous social contract may raise the reservation wage of (young) nationals and therefore reduce the probability of accepting private sector job offers. Accordingly, frictional unemployment rises. Also, the generous social contract may take the form of free education. However, spending on education that does not equip students with job market skills and instil continuous learning may increase both frictional and structural unemployment.

⁶ The correlation coefficient of petroleum production and compensation of government employees (government final consumption) is 0.48 (0.42). Petroleum production data is obtained from the Energy information administration (accessed on September 9, 2023).

⁷ Also, the correlation coefficient of petroleum production and government expenditure on education is 0.68.

⁸ No observations are available for Oman and Qatar though. The figure for the UAE is surprisingly low.

⁹ ‘HF’ refers to the flexibility of hiring and firing practices. ‘C’ refers to the labour-employer relationship, which could be cooperative or confrontational. ‘WF’ refers to the wage determination flexibility at the firm or the union levels. ‘PP’ refers to the extent that wages are related to productivity. ‘PM’ refers to the selection of senior management either based on merit and qualifications or kinship and friendship.

¹⁰ This akin to the differences in GCC countries unemployment rates, distinguished by age and gender, as Table 1 shows.

¹¹ Labour standards include working time, fixed-term contracts, employment protection, minimum wages, and employees’ representation rights. Treatment of the unemployed include the replacement rate or the level of benefits, duration of benefits, and active labour market policies. Active labour market policies include labour market training, assistance with job search, subsidized employment, and special measures for the disabled.

¹² Madsen (1998) examines empirically the general equilibrium (structuralist) models of unemployment of Phelps (1994), Layard and Nickell (1986) and Layard et al. (1991) in the context of OECD countries. In these models, labour market institutions and taxes play a key role in explaining unemployment. Madsen (1998) estimates the unemployment rate, per Phelps (1994), in terms of unanticipated inflation, the share of youth of age 20–24 in population, government real net debt, real capital stock, real government expenditure, direct tax rate, employment tax rate and other indirect labour costs borne by the firm, world real interest rate, real oil price, exchange rate induced price mark-ups over marginal costs, the replacement ratio, and duration of unemployment benefits. Similarly, for Layard and Nickell (1986), Madsen (1998) estimates unemployment rate in terms of unanticipated inflation, cyclical demand induced mark-ups, job mismatch, ratio of imports to GDP as a function of the difference between import prices and value-added price deflator, the direct and indirect tax rates, employment tax rate and other indirect labour costs borne by the firm, the replacement ratio, and the duration of unemployment benefits.

¹³ Scarpetta (1996) uses active labour market policies, unemployment benefits, employment protection legislation, non-wage labour costs, as well as institutional factors (unionization and wage setting, and product-market competition proxied by trade) and real interest rates and terms of trade.

¹⁴ This point is relevant to the GCC countries.

¹⁵ Besides these institutional factors, Caroleo and Pastore (2007) and Pastore (2015) emphasize youth experience gap as a key factor in explaining youth unemployment in EU countries. The youth experience gap depends on the educational and training systems and is influenced by labour market flexibility, income support schemes and fiscal incentives. O’Higgins (2005) stresses decent work for youth employment in terms of wages, weight of the informal sector and underemployment.

¹⁶ They use a two-step system generalized method of moments (GMM) estimation methodology to account for the lagged dependent variable and potential simultaneity. In doing so, they consider all explanatory variables as endogenous and instrument them using up to two lags.

¹⁷ In 2000–2020, the average share of fuel in merchandise exports amounted to 55.2% in Bahrain, 94% in Kuwait, 80% in Oman, 87.9% in Qatar, 85.5% in Saudi Arabia and 58.4% in the UAE.

¹⁸ The influence of LABOR coefficient on the unemployment rate is the product of LABOR estimated coefficient and LABOR mean value. For example, given that the mean (log) WF is 1.73 and the value of its coefficient in the total unemployment rate panel is 1.667, an improvement in WF by 1% reduces the total unemployment rate by about 0.03% point.

¹⁹ The mean (log) of linking pay to productivity is 1.67. Calculation of influence on female unemployment rate is similar to the footnote above.

²⁰ The mean (log) DENSITY is 4.45.

²¹ The openness ratio is calculated as the ratio between exports and imports. The influence of the ratio expressed in percentage is the coefficient divided by 100.

²² Calculation is similar to footnote 18.

²³ Government size is positively associated with the unemployment rate (Almula-Dhanoon, Dhannoon, and Hammadi 2020b; Perone 2022).

Additional information

Funding

The work was supported by the United Arab Emirates University [College of Business and Economics Annual Research Program (CARP)].