Labor market reforms, growth, and unemployment in labor-exporting countries in the Middle East and North Africa

Abstract

A general equilibrium model is used to study the impact of labor market policies on growth, employment, urban inequality, and rural welfare in labor-exporting countries in the Middle East and North Africa. Various experiments are conducted, such as a reduction in payroll taxation, cuts in public sector wages and employment, and a reduction in trade unions’ bargaining power. We find that overseas employment may, under certain circumstances, substitute for domestic informal sector employment as the main buffer in labor market adjustment. In addition, we argue that to foster broad-based welfare-enhancing job creation in the region, labor market reforms must take account of general equilibrium effects, including crowding-in effects on private investment and variations in income remittances and international migration patterns. Finally, we argue that labor market reforms should be viewed as a component of a more comprehensive program of structural reforms aimed at spurring growth and employment.